Tag: MPC

‘Repo Rate Unchanged at 6.50%, Committed to Limit Inflation at 4%’: RBI Gov

The RBI has projected India’s Q2 retail inflation at 6.2%; Q3 at 5.7% and Q4 at 5.2% in the current fiscal year.

New Delhi: The Reserve Bank of India (RBI) on Thursday left the repo rate unchanged at 6.50%, the Indian Express reported. The key policy rate has remained unchanged for three cycles.

RBI Governor Shaktikanta Das said that the six-member monetary policy committee (MPC) unanimously decided to keep the lending rate at 6.50%. The MPC also retained its withdrawal of accommodation stance to ensure that the retail inflation remains within the targeted 4%. Withdrawal of accommodative stance means reducing the money supply in the system to rein in inflation.

Earlier, the central bank’s policy committee had hiked the repo rate by 250 basis points from May 2022 to February 2023. Das said that the headline inflation after reaching a low of 4.3% in May 2023, rose in June and is expected to surge during July and August, owing to the rise in vegetable prices, the Indian Express reported.

The RBI has projected India’s Q2 retail inflation at 6.2%; Q3 at 5.7% and Q4 at 5.2% in the current fiscal year, the report said.

Das said that the consumer price index (CPI) inflation forecast for FY2023-24 has been raised to 5.4% from 5.1% due to the rise in vegetable prices, while the gross domestic product (GDP) forecast has been retained at 6.5%, with risks evenly balanced.

“While the vegetable price shock may reverse quickly, possible El Nino weather conditions, along with global food prices need to be watched closely, against the backdrop of a skewed Southwest Monsoon,” Das was quoted by the paper as saying.

“These developments warrant a heightened vigil on the evolving inflation trajectory,” Das cautioned.

“The cumulative rate hike of 250 basis points, undertaken by the MPC so far, is working its way into the economy. Nevertheless, domestic economic activity is holding up well, and is likely to retain its momentum, despite, weak external demand. Considering this confluence of factors, the MPC decided to remain watchful and evaluate the emerging situation,”

Das reaffirmed that the MPC is resolute in its commitment to “align inflation to the 4% target” and “anchoring inflation expectations”.

The RBI also asked banks to set aside a larger part of incremental deposits to tighten liquidity. With effect from the August 12 fortnight, banks shall maintain an incremental cash reserve ratio of 10% on increase in deposits between May 19 and July 28, Das said.

RBI Assures Ample Liquidity Even as It Holds Rates

The RBI held the repo rate, its key lending rate, at 4% and kept the reverse repo rate, the borrowing rate, unchanged at 3.35%.

Mumbai: The Reserve Bank of India (RBI) kept interest rates at record lows on Friday and announced additional bond purchases to support the economic recovery, at risk of being derailed by a devastating second wave of COVID-19 infections.

The RBI held the repo rate, its key lending rate, at 4% and kept the reverse repo rate, the borrowing rate, unchanged at 3.35% as predicted in a Reuters poll.

RBI governor Shaktikanta Das said all six members of the monetary policy committee (MPC) voted in favour of keeping rates on hold and maintaining an accommodative monetary policy stance.

“The MPC was of the view that at this juncture policy support from all sides is required to gain the momentum of growth that was evident in the second half of 2021 and to nurture the recovery after it has taken root,” Das said.

Das also said RBI will buy Rs 1.2 trillion ($16.44 billion) worth of bonds in the September quarter on top of its current quantitative easing programme called G-SAP 1.0.

Also read: COVID’s Bitter Pill: India’s GDP Contracts 7.3% In FY’21

Indian financial markets showed little reaction to the announcement which had been widely expected.

India’s annual economic growth rate picked up in January-March compared with the previous three months.

But economists are increasingly pessimistic about the June quarter after a huge second wave of COVID-19 infections hit the country last month and led the RBI to announce interim measures.

Das said the monetary policy committee projects GDP growth at 9.5% in the fiscal year 2021/22, down from a previous forecast of 10.5%. Retail inflation is seen at 5.1% in 2021/2022.

“Their insistence on ignoring the inflationary build up due to rising commodity and food prices is extremely intriguing and could pose financial stability risk at some stage,” said independent adviser and market expert Sandip Sabharwal.

“The economy can take (a) graded removal of liquidity but any successive liquidity and rate action when inflation spikes up rapidly in the data a few months from now will be more disruptive for the economy,” he added.

The central bank has slashed the repo rate by a total of 115 basis points (bps) since March 2020 to soften the blow from the pandemic.

The RBI in April committed to buying Rs 1 trillion worth of government bonds from the market between April and May in a quantitative easing program it called G-SAP 1.0.

“We will continue to think and act out of the box, planning for the worst and hoping for the best,” Das said. “The need of the hour is not to be overwhelmed by the current situation but to collectively overcome it”.

(Reuters)

Inflation Concerns Prompt RBI to Maintain Status Quo on Interest Rates

The central bank believes that Q3 and Q4 for FY’21 will see some GDP growth at 0.1% and 0.7% respectively – while the real GDP projection for the full year is -7.5%.

New Delhi: The Reserve Bank of India’s monetary policy committee on Friday morning decided to keep key policy rates unchanged, even as growth appears set to recover and as rising inflation continues to pose challenges.

Consequently, the repo rate stays at 4%, while the reverse repo rate remains unchanged at 3.35%.

“The MPC decided to continue with accommodative stance of the monetary policy as long as necessary, at least till the current financial year and into next year to revive growth on a durable basis and mitigate the impact of COVID-19 while ensuring that inflation remains within target,” said RBI governor Shaktikanta Das.

The central bank believes that Q3 and Q4 for FY’21 will see some GDP growth at 0.1% and 0.7% respectively – while the real GDP projection for the full year is -7.5%.

Inflation, however, is not far from the MPC’s mind.

“The MPC is of the view that inflation is likely to remain elevated, barring transient relief in the winter months from prices of perishables. This constrains monetary policy at the current juncture from using the space available to act in support of growth,” the committee’s statement noted.

“At the same time, the signs of recovery are far from being broadbased and are dependent on sustained policy support. A small window is available for proactive supply management strategies to break the inflation spiral being fuelled by supply chain disruptions, excessive margins and indirect taxes. Further efforts are necessary to mitigate supply-side driven inflation pressures. Monetary policy will monitor closely all threats to price stability to anchor broader macroeconomic and financial stability.”

Also read: Online Outages: RBI Stops HDFC Bank From Digital Launches, Sourcing New Credit Cards

According to government data, India’s retail inflation rose to its highest level in October 2020 in more than six years, primarily on the back of higher food prices.

CPI (consumer price index) data showed that inflation stood at 7.61% in October, the highest since May 2014, while retail inflation was recorded at 7.27% in September.

“The outlook for inflation has turned adverse relative to expectations in the last two months. The substantial wedge between wholesale and retail inflation points to the supply-side bottlenecks and large margins being charged to the consumer. While cereal prices may continue to soften with the bumper kharif harvest arrivals and vegetable prices may ease with the winter crop, other food prices are likely to persist at elevated levels,” the MPC statement noted.

“Crude oil prices have picked up on optimism of demand recovery, continuation of OPEC plus production cuts and are expected to remain volatile in the near-term. Cost-push pressures continue to impinge on core inflation, which has remained sticky and could firm up as economic activity normalises and demand picks up. Taking into consideration all these factors, CPI inflation is projected at 6.8 per cent for Q3:2020-21, 5.8 per cent for Q4:2020-21; and 5.2 per cent to 4.6 per cent in H1:2021-22, with risks broadly balanced…”

Raghuram Rajan, Viral Acharya Slam RBI Panel Advice to Allow Large Corporates in Banking

In a joint note published on Monday afternoon, the former RBI officials have also questioned the timing of the move, which comes at a time when India is learning the lessons from failures like ILFS and Yes Bank.

New Delhi: Economists Raghuram Rajan and Viral Acharya have strongly criticised a recent proposal by a Reserve Bank of India (RBI) panel to allow large corporate groups into the banking sector, calling it a “bombshell” move that could further exacerbate the concentration of economic and political power in “certain business houses”.

In a joint note published on Monday afternoon, the duo, both of whom are former RBI officials, have also questioned the timing of the move, suggesting that the Narendra Modi government may want to “expand” the set of potential bidders when it finally starts privatising India’s public sector banks.

“While the [RBI internal working group’s] proposal is tempered with many caveats, it raises an important question: Why now? Have we learnt something that allows us to override all the prior cautions on allowing industrial houses into banking? We would argue no. Indeed, to the contrary, it is even more important today to stick to the tried and tested limits on corporate involvement in banking,” Rajan and Acharya write.

“The rationales for not allowing industrial houses into banking are then primarily two. First, industrial houses need financing, and they can get it easily, with no questions asked, if they have an in-house bank. The history of such connected lending is invariably disastrous – how can the bank make good loans when it is owned by the borrower?”

On November 20, the internal working group released its report that reviewed a number of regulations surrounding bank ownership guidelines.

Also read: RBI Working Group Suggests Converting NBFCs Into Banks, Other Sweeping Changes

However, its recommendation on industrial houses entering the banking sector has received maximum attention, with even foreign rating agencies like S&P Global calling it a “risky proposition”.

In their note, Rajan and Acharya argue that “highly indebted and politically connected business houses” will have the greatest incentive and ability to push for new banking licenses, a move that could make India more likely to succumb to “authoritarian cronyism”.

“Can the regulator not discriminate between “fit and proper” businesses and shady ones? It can, but it has to be truly independent, with a thoroughly apolitical board. Whether these conditions will always pertain is debatable. Moreover, once the bank license is given, the licensee’s temptation will be to misuse it because of self-lending opportunities. India has seen a number of promoters who passed a fit and proper test at the time of licensing turn rogue,” the duo note.

Only one expert in favour

The former RBI officials also point out that the Internal Working Group or IWG itself notes in its appendix that a majority of experts consulted by the panel were of the opinion that large corporate groups and industrial houses should not be allowed to promote a bank – and yet the final recommendation made by the committee is the opposite.

Also read: India Faces a Major Economic Catastrophe, PMO Can’t Handle By Itself, Says Raghuram Rajan

“More important, why now, at a time when we are still trying to learn the lessons from failures like ILFS and Yes Bank? One possibility is that the government wants to expand the set of bidders when it finally turns to privatising some of our public sector banks… A second possibility is that an industrial house holding a payment bank license wants to transform into a bank. One recommendation of the IWG that is equally hard to understand is to shorten the time for such transformation from five to three years, so perhaps the surprising recommendations have to be read together.”

RBI Working Group Suggests Converting NBFCs Into Banks, Other Sweeping Changes

It also recommended increasing the size of the stake that promoters in private banks can hold to 26% from the current 15% over a 15-year time frame.

Mumbai: A working group of the Reserve Bank of India has recommended a series of changes that could transform the country’s banking landscape by paving the way for large industrial conglomerates to set up banks.

The proposals could also allow large non-banking finance companies and niche payment banks to convert into lenders.

In a report made public on Friday, the committee recommended that banking regulations be amended to allow large industrial houses to act as so-called bank promoters, meaning they could take a significant stake in a lender, something the central bank has strongly resisted in the past.

As well as opening up the banking sector, the committee also suggested adjusting the size of the stakes major shareholders can hold in a lender.

Also watch | RBI’s Monetary Policy Announcement: Key Takeaways You Need to Know

For non-promoter shareholdings a uniform cap of 15% instead of a current tiered structure has been suggested by the committee, which was formed in June to review ownership guidelines and the corporate structure of Indian private sector banks.

It recommended increasing the size of the stake that promoters in private banks can hold to 26% from the current 15% over a 15-year time frame.

In 2018, billionaire banker Uday Kotak, managing director of Kotak Mahindra Bank, took the central bank to the court over an order from the regulator to reduce his stake in the lender to 15%.

The panel’s recommendations may also pave the way for shadow banks to convert into lenders. A Non Banking Financial Company (NBFC) or shadow bank with assets of Rs 500 billion ($6.75 billion) and above may be considered for conversion into a bank after 10 years of operations, the report said.

(Reuters)

RBI Monetary Policy Panel to Remain Accommodative, Wary of Inflation

Structural reforms to unlock growth are needed but may lack support with growth and employment depressed, Deputy Governor Michael Patra said.

Mumbai: A second wave of COVID-19 remains a threat to the Indian economy and the central bank believes monetary policy needs to remain accommodative despite inflationary pressures, according to the minutes of the monetary policy committee’s latest meeting, released on Friday.

The Reserve Bank of India left interest rates unchanged at that meeting two weeks ago, as expected.

Almost all members of the MPC said they see room for further easing, but a recent rise in price pressures would need to abate for them to use that space.

“This space needs to be used judiciously to support recovery in growth,” Governor Shaktikanta Das wrote in his minutes.

Structural reforms to unlock growth are needed but may lack support with growth and employment depressed, Deputy Governor Michael Patra said.

“In the absence of intrinsic drivers, the recovery may last only until pent-up demand has been satiated and replenishment of inventories has been completed,” Patra said. “Empirical evidence suggests that consumption-led recoveries are shallow and short-lived.”

Dissent note

One of the new external members, Jayanth Varma, added a dissent note as part of his minutes. He agreed with the MPC’s intention to keep policy accommodative during the current financial year and into the next financial year, he said, but he opposed using the word “decided”.

“It appears to me that the steep yield curve reflects a lack of credibility of the MPC’s existing accommodative guidance,” he said, but the MPC was risking making a commitment it might not be able to keep as new data emerges or conditions change. He said he would have preferred to use the word “expected”.

Varma pointed out the damage inflicted by high long-term interest rates on the economy as policy rates fail to feed through, causing a collapse in investments.

Governor Das said, however, guidance from the central bank would help translate policy rates into longer-term yields and bolster consumption and investment demand.

(Reuters)

MPC 2.0 Refrains from Rate Cut, but RBI Continues to Take Right Steps on Liquidity Front

Perhaps the most important measure announced was the RBI’s decision to buy state government bonds.

Rate cut or no rate cut, whatever the Reserve Bank of India does makes news. This time around, the central bank’s monetary policy committee has decided to keep the current interest rates unchanged. This was to be expected, for the inflation level, measured through the consumer price index, is ruling above the prescribed upper level. And price rise, always a touchy issue, is now a political cause for concern in the aftermath of the pandemic as it hurts the country’s poorest the most.

Indeed, the RBI has done well to keep the key policy rates unchanged. If a rate cut was a cure for demand revival, the previous cuts haven’t clearly seen any big jump in the overall demand.

Instead, where the central bank has consistently focused is on easing the liquidity in the system. Since the outbreak of coronavirus in March, the banking regulator has, in fact, been proactively addressing the liquidity issue. Of course, as C. Rangarajan, former governor of the RBI, said, the constraint for growth “goes beyond” credit availability. The hint here is that the responsibility goes beyond the monetary authority and devolves equally on the fiscal mandarins.

Having said this, the RBI has done well within its domain to facilitate an environment that could quickly help the sliding economy to make a reversal if the other half of the policy apparatus (read the government) could get its act together without loss of time.

There are indeed some significant moves by the RBI, now driven by a new-look MPC (Monetary Policy Committee).

The RBI has signalled that is now ready for infusing more targeted liquidity.

It said it would conduct on-tap targeted long-term repo operations (TLTRO) with tenors of up to three years for a total amount of up to Rs 1,00,000 crore at a floating rate linked to the policy repo rate. The scheme will be available up to March 31, 2021 with flexibility with regard to enhancement of the amount and period after a review of the response to the scheme.

Watch | RBI’s Monetary Policy Announcement: Key Takeaways You Need to Know

The on-tap targeted long-term repo operations could ensure that the benefits do not remain with just the government. On-tap TLTROs will enable banks to borrow from the RBI any time and use the proceeds to buy corporate bonds or even lend to fund-starved sectors.

A more significant move is its decision to conduct open market operations in SDLs (state development loans). Now, the RBI, for the first time perhaps, is willing to invest in these state bonds.

“At present, SDLs are eligible collateral for Liquidity Adjustment Facility (LAF) along with T-bills, dated government securities and oil bonds. To improve liquidity and facilitate efficient pricing, it has been decided to conduct open market operations (OMOs) in SDLs as a special case during the current financial year. The OMOs would be conducted for a basket of SDLs comprising securities issued by states,” the RBI said.

Starting next week, the size of the open market operations (OMO) to buy government bonds will be increased to Rs 20,000 crore. So far, auction sizes have been around Rs 10,000 crore.

This move, some say, is a more effective way of bringing the yield down on benchmark government securities.

All these initiatives are seen in a holistic sense. The debt management assumes a critical dimension with the focus on keeping the yield on long-term papers reasonable so as to provide a friendly cost environment for borrowers of all kinds.

K.T. Jagannathan is a senior business journalist.

Watch | RBI’s Monetary Policy Announcement: Key Takeaways You Need to Know

The move, which was widely expected by both market experts and economists, comes amid some signs of recovery in the Indian economy, which has been hurt badly by the COVID-19 pandemic.

In a unanimous vote, the Reserve Bank of India’s Monetary Policy Committee (MPC) has decided to keep key interest rates unchanged but will continue with its accommodative stance “as long as necessary”.

With this decision, the repo rate has been left unchanged at 4%, while the reverse repo remains at 3.35%.

The move, which was widely expected by both market experts and economists, comes amid some signs of recovery in the Indian economy, which has been hurt badly by the COVID-19 pandemic.

RBI MPC Keeps Interest Rates Unchanged, Central Bank Sees Economy Shrinking by 9.5% in FY’21

The move was widely expected and comes amid some signs of recovery in the Indian economy, which has been hurt badly by the COVID-19 pandemic.

New Delhi: In an unanimous vote, the Reserve Bank of India’s Monetary Policy Committee (MPC) has decided to keep key interest rates unchanged, but will continue with its accommodative stance
“as long as necessary”.

With this decision, the repo rate has been left unchanged at 4%, while the reverse repo remains at 3.35%.

The move, which was widely expected by both market experts and economists, comes amid some signs of recovery in the Indian economy, which has been hurt badly by the COVID-19 pandemic.

“By all indications, the deep contractions of Q1:2020-21 are behind us; silver linings are visible in the flattening of the active caseload curve across the country. Barring the incidence of a second wave, India stands poised to shrug off the deathly grip of the virus and renew its tryst with its pre-COVID growth trajectory,” Central bank governor Shaktikanta Das

While the RBI’s growth projections suggest that GDP growth may “turn positive” by Q4, it has officially estimated that the economy will shrink by 9.5% in FY’21, with “risks tilted to the downside”.

“I have always dared to be an optimist, believing firmly in the ability of humankind to overcome the pandemic. In the months gone by, when COVID-19 raged in fury across the world, our hopefulness might have appeared impudent, like a flame flickering amidst a gathering storm. Today, there is a turn in the wind, which suggests that it is not imprudent to dream of a brighter tomorrow even in the bleakest of times,” Das said.

Friday’s decision also marks the end of the first meeting of the new MPC, which was re-constituted after the appointment of three new outside members – economists Jayanth Verma, Ashima Goyal and Shashanka Bhide.

Their appointments were made earlier this week and were widely seen as the reason why the MPC meeting, which was earlier scheduled for September 29 to October 1, was delayed.

As Food Prices Rise More Slowly, India’s Retail Inflation Eases in August

But analysts said that supply constraints still remained, which is likely to keep food prices high.

New Delhi: India’s annual retail inflation eased slightly in August as food inflation cooled, but remained above the upper end of the Reserve Bank of India’s (RBI) medium-term target for the fifth straight month, government data showed on Monday.

Retail inflation in August of 6.69% was lower than the 6.85% forecast in a Reuters poll of analysts and the 6.73% registered in July.

Food inflation eased a bit last month as India unlocked most parts of its economy which helped in addressing some of the supply chain distortions that the world’s strictest lockdown had created since mid-March.

But analysts said that supply constraints still remained, which is likely to keep food prices high even though agricultural production is likely to be helped by good monsoons seen this year.

Food inflation eased to 9.05% compared to 9.27% in July.

Also read: Retail Inflation Above MPC Comfort Range For Fourth Straight Month

Rising coronavirus infections in India raises the risk of further supply disruptions with India seeing cases increasing faster than in any other country and it lags only the United States in total infections.

August inflation is unlikely to give the RBI room to consider a rate cut at its next policy meeting in October to revive the economy after a record 23.9% contraction in GDP in the January-March quarter.

“The inflation figure for the fifth month in a row remains above RBI’s medium term target of 6%, so RBI rate cut hopes still remains low at least at the Oct policy (meeting),” said Rahul Gupta from Emkay Global Financial Services.

The inflation data indicated that core inflation for August ranged between 5.77% and 5.80%, according to three analysts’ calculations, slightly lower than 5.8%-5.9% in July.