As per the mandate and the expectation, the Reserve Bank of India (RBI) should focus on growth, inflation and prices. Given the tranquility on all these three fronts, the monetary policy committee (MPC) on Wednesday chose to keep the key rates unchanged.
Repo rate, reverse repo rate and cash reserve ratio (CRR) have all been retained at their previous levels of 6.5 per cent, 6.25 per cent and 4 per cent, respectively, encouraging several economists and analysts to see continuation of RBI’s ‘wait and watch’ policy.
Even in October, when MPC met for its customary two-day session, it declared a ‘pause’ on tightening of the money policy. In fact, it was termed as the ‘calibrated tightening’ of its policy framework. What RBI did on Wednesday was to continue with this cautious stance without opting for a more liberal approach.
RBI could have easily fallen back on the modest consumer inflation, stagflation in vegetables prices, strong growth possibility to declare that worse was over anyway. If liquidity were to be improved as pushed for by finance minister Arun Jaitley, finance ministry officials and government nominees on RBI board, then RBI governor Urjit Patel could have easily taken the lead and opted for a more liberal policy stance. CRR could have been cut by 25 basis points just to signal that both the central bank and the government were on the same page if not for anything else.
Instead, RBI preferred a more nuanced approach with decision to buy more government paper till the end of this financial year. This will definitely perk up the bond market, improve sentiment and inject some liquidity into the system craving for more cash. Sharing liquidity related data on daily basis would also help banks plan for their liquidity requirements in advance. One is definitely baffled by RBI decision to stay put on key rates though it cited inflation would be as low as 2.7-3 per cent in second half, which is much lower than the targeted 4 per cent for entire financial year. Low commodity prices, especially crude oil in global markets, have also not triggered an easier policy stance. This allows room for one to conclude that, perhaps, RBI was over-cautious even on signaling the easy money policy going forward.
Interestingly, RBI stuck to its earlier growth projections of 7.4 per cent notwithstanding that last quarter GDP numbers that were relatively modest with 7.1 per cent. The central bank also seems to have held back on improving liquidity with non-banking finance companies (NBFCs) that were hit after the IL&FS defaults got reported. Also, housing finance companies (HFCs) that expected some support may have to wait a little while more. Patel’s team has only reiterated that RBI would be ready to play its designated role of “lender of last resort” while dealing with NBFCs and HFCs.
Apart from setting up the panel to consider liberalised terms for lending to MSMEs, benchmarking them to repo rate would translate to lower costs for small businesses. RBI directive on appointing board of management in urban cooperative banks (UCBs) will kick off reforms in these banking companies that are starved for capital notwithstanding credit demand from clients. Till date most UCBs have been one-man shops. Bringing in professionals to manage these banks will bring fresh breeze into boardrooms of these organisations.
The government will perhaps reconcile to living with an RBI governors’ team that’s conservative, tentative and stiff necked before unleashing any measure. Majority of central bankers perhaps fall in this category and RBI may not be an exception. For now, it’s over to the finance minister who’s kicked off election year budget formulation to take the lead and infuse fresh momentum in the market.