The Reserve Bank of India’s Monetary Policy Statement for 2016-17 was released on February 8, 2017. This is the sixth bi-monthly monetary policy released by the RBI for the year 2016-17. The policy repo rate under the Liquidity Adjustment Facility has been kept unchanged at 6.25%.  As a result, the reverse repo rate also remains unchanged at 5.75%.  The Marginal Standing Facility rate and the Bank Rate has been kept stable at 6.75%.

Great Expectations

A common evening scene at Mumbai’s railway stations – a fidgety and impatient crowd waiting for a local train. Heads bob up and down over the mass of people, trying desperately to catch a glimpse of the headlights of an approaching local. It isn’t enough if a co-passenger has stood on his toes to check the end of the station’s horizon. You must do it too, to be assured.

The restlessness grows once the crowd sights a bright headlight ahead. You take your position, ready to barge into the bogie like a bull bursting into a jallikattu arena. As the approaching light grows brighter and comes closer, your adrenaline pumps hard. The activity reaches a crescendo as the train enters the station. People step back from the edge, crowing in anticipation to time themselves into a utopian gap amidst the already jam-packed doorway. And then, there is a sudden realisation of misplaced enthusiasm. Beyond the glaring headlight, the train looks nothing like the familiar local. It’s a goods train, of no consequence to the hyperactive mass of humanity on the platform.  The river of desperation flows through the crowd, waiting for this uninvited guest to pass as soon as it can.

Sober Response

A similar scene was observed in the banking sector.  The RBI express thundered into the Banking Station, but belied all expectations. For days, finance industry biggies gobbled up the television footage, predicting a cut in the repo rates in the backdrop of a credible budget presented by Finance Minister Arun Jaitley. Their expectation was not unjustified because of the following reasons:

  • Inflation has been relatively under control in the 3-4% band.
  • The Finance Bill of 2017 focuses on ensuring fiscal discipline and multiple measures to revive the growth rates.
  • Statistical data like IIP also indicated signs of an economy stirring from its stupor.
  • Credit off take from banks was seen to be reviving.
  • The US Federal Reserve was not expected to raise interest rates owing to a strengthening dollar.

But, as they say, for eleven players giving their best to win a match, there are one billion expert commentators analysing their every move.

Monetary Policy: Conservative Approach

The RBI’s Monetary Policy has been conservative in its analysis of the global economic scenario. Its six-member Monetary Policy Committee made the following observations:

  • In the light of uncertain US macro economic policies and the early recovery signals in Russia, Brazil and China, the growth prospects for emerging market economies are expected to be moderate.
  • Oil prices are expected to firm up internationally since OPEC announced their decision to curtail production.
  • Exchange rates could remain volatile on account of global financial market developments.
  • Gross Value Added (GVA) is expected to be around 7.4%, as the RBI anticipates a marked increase in the growth rate of the economy.
  • Performance across all sectors has been subdued. Food prices are expected to remain low as a result of comfortable supply conditions.
  • Inflation is projected to be in the range of 4.0 to 4.5%. However, it is observed that there is a resistance in the downward movement of inflation rates in sectors excluding food and fuel. This may have repercussions on the economy.
  • The outlook will be neutral as opposed to how it was accomodating earlier.

The rates remain unchanged as follows:

  • Repo Rate: 6.25%
  • Reverse Repo Rate: 5.75%
  • Marginal Standing Facility Rate: 6.75%
  • Bank Rate: 6.75%
  • Cash Reserve Ratio: 4%
  • Statutory Liquidity Ratio: 20.50%

Prodding The Banks

The RBI’s Monetary Policy, while desisting from tinkering with the repo rates, has also poked banks to wake up from their stupor. It stated that rates will be revised only when the banking sector’s non-performing assets are resolved more quickly and efficiently. Apart from this, the RBI expects the recapitalisation of banks to gather more momentum and interest rates of small savings schemes to be more market sensitive to their benchmarks.

New Initiative

The Reserve Bank of India has identified three pillars of the financial sector supervision system to be regulation, surveillance and enforcement. Presently, the regulation and surveillance functions are well established mechanisms within the organisation. A separate Enforcement Department has been established to deal with cases of non-compliance with regulations identified through the surveillance process.

In Conclusion

The Monetary Policy Committee of the RBI was unanimous in its decision. Status quo has been maintained on the interest rates. The schedule for the next review is on April 5 and 6, 2017.


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