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  • 5 ways to read 'RBI credit policy stance'

    Whenever the Reserve Bank of India announces the credit policy, it sets the tone of the monetary policy through a credit policy stance. Besides the borrowing rates that are regularly set by the Monetary Policy Committee headed by the RBI governor Urijit Patel, RBI issues a lot of information that gives a sense of what lies ahead.

    Here are 5 things to note:

  • The RBI action:

    The RBI committee left key rates unchanged in the credit policy announced. The most important part of the policy is the repo rate, the rate at which it lends to banks. It was left at 6.25%. This rate pretty much decides the borrowing cost for everyone in the market. The action surprised everyone in the market. Most expected a 0.25% cut in the repo rate. Needless to say, financial markets reacted negatively as they often do when expectations are not met. Government bond prices fell and benchmark equity indices ended in the negative territory.

  • What RBI said:

    What’s more important in the policy this time was the change in the credit policy stance. RBI said that it revised it to ‘neutral’ from ‘accommodative’. An accommodative stance means a central bank will cut rates to inject money into the financial system whenever needed. A change in this stance to ‘neutral’ means RBI will alter rates in any direction to control the money supply in the system. This was the surprise that led to the fall in bond and stock prices.

  • Why was this done:

    The RBI committee considered the fall in prices of key components of inflation due to demonetization in November and December. This is likely to keep retail inflation at levels lower than the RBI’s original target of 5% for the January-March 2017 quarter. As the effect of demonetization falls, inflation due to higher demand for good and services can jump. This can then result in a higher inflation number in the second half of 2017-18. The committee projects inflation to be at 4.5% to 5% then. This does not include any external shock that could be caused due to a spike in oil prices or global trade wars. Overall, the RBI committee is watching the risk to inflation like a hawk.

  • What can change the stance:

    In the aftermath of demonetization, banks have cut lending rates. The RBI committee believes that banks have enough money to lend to borrowers of all kind. It also expects banks to act on resolving the bad loans in the banking system. That would cut down the provisioning in the banking system and leave more money in the hands of the banks to further lend to borrowers over the next 12 months. To add to this, the government is working on a formula to align small savings rates to government bond yields. This could ensure additional money in the system. The swiftness in the implementation of these two measures can influence the RBI committee’s future policy. Of course, this will be in addition to the inflation outlook.

  • Outlook:

    Overall, the RBI committee wants to remain non-committal. While the government, businesses, and individuals want key interest rates in the system to remain low, RBI wants to ensure that it does not move away from the stated objective of the policy to track inflationary trends. That way, the RBI committee is perhaps asserting independence.

    • RBI’s credit policy statement has wealth of information for further reading. Read more

    • An interesting analysis of the credit policy Read more

  • 6.9

    The Reserve Bank of India’s monetary policy committee expects India’s growth to be 6.9% for 2016-17. This is lower than the Central Statistics Office’s (CSO) projection of 7%. However, it projects a growth of 7.4% for 2017-18. This is because the RBI expects a rise in discretionary consumer demand that has been held back by demonetization. Cash intensive sectors like retail trade, hotels, restaurants, transportation, and the unorganized sector are all expected to be ‘rapidly restored’, as per the RBI committee. This is perhaps good news for the economic growth in the quarters ahead.