CREDIT POLICY - SHARP RECOVERY IN growth on the cards
After the demonetization drive of last year and the Union Budget in Febru ary, there were strong expectations that the Reserve Bank of India (RBI) would come out with a “25 basis points“ cut in the repo rate in its Credit Policy review last week.
It was believed the time was just right for a “25 basis points“ cut in the policy rate, as risks to stability had moderated. The reduction in the repo rate was expected to fuel growth. The expectation of a repo rate cut was also on the back of the low inflation rate.The Consumer Price Index (CPI) based inflation rate has come down. Further, the government's fiscal deficit is at a prudent level.In addition, the US Federal Reserve is expected to delay further raise in interest rate. However, contrary to expectations, the RBI refrained from easing the monetary policy further. On the basis of an assessment of the macroeconomic conditions, the Monetary Policy Committee (MPC) decided to maintain status quo. It decided to keep the policy repo rate unchanged at 6.25%; the RBI left the rate unchanged in the last policy review in Decemer 2016, too, saying that the policy stance remains accommodative.
According to the RBI, this stand is in keeping with the objective of achieving a CPIbased inflation rate of 5% by the last quarter of fiscal year 2016-17, and the medium-term target of 4% in a band of plus or minus 2%.At the same time, it aims to continue its support to growth with this decision.
The RBI is of the view that persistence of inflation, excluding food and fuel, can limit further downward movement in the headline inflation rate, although the CPI-based inflation rate is expected to be contained at 5% in financial year 2017-18.
The RBI predicted growth for 2016-17 at 6.90%. Growth is expected to recover sharply in 2017-18 on account of two factors-discretionary consumer demand, which was held back by demonetization and expected to come back, and economic activity in cashintensive sectors like retail trade, restaurants, transportation, as well as in the unorganized sector, which is expected to be rapidly restored.
Also, the demonetization-induced ease in bank funding conditions has already led to a drop in interest rates.
The RBI pointed out that there are some significant upside risks for inflation. These include a hardening in international crude oil prices and volatility in the exchange rate on account of global financial market developments. The Budget promised increased infrastructure spending and jobs, and slashed tax for some companies.
The RBI has underlined its resolve to bring the headline inflation rate closer to 4% on a durable basis and in a calibrated manner. This requires a further decline in inflation expectations.
The central bank aims to give itself more room to manage inflation. The option to cut rates is always available to the RBI. It can use it as and when there is some more certainty regarding inflationary forces. Presently, it is focusing on balancing inflation and growth.
Home loan borrowers should, in any case, opt for a floating rate loan only in order to take advantage of the rate cuts in the ensuing months, as the uncertainty settles down and helps the RBI in softening the interest rates.