Monetary and Credit Policy of the RBI

Monetary and Credit Policy of the RBI!

On May 3, 2013, the Reserve Bank of India (RBI) announced its Annual Policy Statement (APS) of Monetary and Credit Policy, 2013-14. RBI Governor, Mr. D. Subbarao presented the policy statement, 2013-14 with an aim to revive the growth process with stability.

Sticking to its cautions stance, the RBI, in its policy, cut the key interest rate by just 0.25 per cent to 7.25 per cent and kept the liquidity enhancing cash reserve requirement unchanged, which disappointed the industry and stock market.

In its annual monetary policy statement, the RBI observed that there would be modest improvement in the country’s economic growth to 5.7 per cent in current year as against the decade’s low growth rate of 5.0 per cent attained in 2012-13.

The RBI also observed that growth cannot be simply revived by rate cut or monetary policy action. It needs to be supplemented by efforts towards easing supply bottlenecks (especially in infrastructure), improving governance and stepping up public investment, along with continuing commitment to fiscal consolidation. Thus in order support the growth strategy, the government should remain active.

The RBI, in its annual policy statement, arranged another repo cut of 25 bp to 7.25 per cent, and kept the cash reserve ratio (CRR) unchanged at 4.0 per cent. Although the RBI refrained from cutting the CRR, it reiterated its intention to manage liquidity actively.

Thus in the absence of CRR cut, open Market Operations (OMO) or purchase of government bonds will be the preferred tool for injecting liquidity into the system.

RBI expects modest improvement in growth scenario only in second half of 2013-14. Accordingly, growth is expected at 5.7 per cent for the year 2013-14 which in lower than that of its expectation. The RBI stated that wholesale price index (WPI) inflation has been moderated to 7.3 per cent in 2012-13 as compared to 8.9 per cent in 2011-12.

Thus recording 6.0 per cent WPI inflation in March 2013 was the lowest in the last three years which was also much lower than 6.8 per cent as expected by the RBI.

This improvement in inflationary situation helped the RBI to go for another rate cut. The RBI now projects to bring down WPI inflation around 5.5 per cent during 2013-14 and to reach the level of 5.0 per cent by March 2014.

Thus the RBI Governor Mr. Subbarao stated, “Overall, the balance of risks stemming from the Reserve Bank’s assessment of the growth inflation dynamic yields little space for further policy easing.” Thus the RBI in its policy statement observed that there is little space for further rate cut.

Monetary policy cannot take the risk to lower its guard against inflation and growing current account deficit (CAD). The CAD is now at twice the sustainable level by 2.5 per cent of GDP. Thus, risks underscored by the RBI in this regard are quite reasonable. Supply bottlenecks or constraints in infrastructure and food are putting pressure on both growth and inflation and structural issues of the country are yet to be addressed.

However, the decision of the RBI to leave the CRR unchanged seems to have been driver by an improvement in the liquidity deficit, as the banks are now drawing around Rs 84,000 crore from the overnight window compared to Rs 1.8 lakh crore of last fiscal.

Thus the RBI now expects inflation to hover around the 5.5 per cent mark in 2013-14 and it will also deploy “all instruments at command” in order to bring it down to 5.0 per cent by March 2014.

However, the RBI did not rule out further rate cut. But after executing 75 bps of rate cut since January 2013, it is quite true that space for further rate cut is remote or little at present. But if the price level recede faster and CAD continues to decline to the comfortable level then executing further rate cut by the RBI may be expected reasonably.

Mid-Quarter Review:

In its mid-quarter review of Monetary and Credit Policy for 2013-14, the Reserve Bank kept the repo rate unchanged at 0.25 per cent, reverse repo rate at 6.25 per cent and the CRR at 4.0 per cent. The fear of inflation is certainly the biggest reason why the central bank in its mid quarter review kept the rates almost unchanged.

Monetary and Credit Policy, 2014-15:

On April 1, 2014, the Reserve Bank of India (RBI) announced its Annual Policy Statement (APS) of Monetary and Credit Policy, 2014-15, RBI Governor Mr. Raghuram Rajan presented the policy statement, 2014-15 with an aim to revive the growth process with stability. The Reserve Bank of India, as expected, left key interest rates unchanged in its first bi-monthly monetary policy review of 2014-15.

Highlights:

Following are some of the important highlights of the annual policy statement of the monetary and credit policy, 2014-15:

1. Short-term lending (repo) rate kept unchanged at 8 per cent.

2. Cash-reserve ratio (CRR) too kept unchanged at 4 per cent.

3. No rate hike if inflation continues to trend lower.

4. Economic growth for 2014-15 is expected at 5.5 per cent.

5. CAD is expected to come down to 2 per cent of GDP in 2013-14.

6. Retail inflation is expected to be under 6 per cent.

Sticking to its cautions stance once again, the RBI kept the repo rate, reverse repo rate and case reserve ratio unchanged which again disappointed the industry and stock market. In its first bi-monthly monetary policy review, the RBI observed that there would be modest improvement in Country’s economic growth to 5.5 per cent in the current year as against the low growth of 5.3 per cent attained in 2013-14.

The RBI, in its bi-monthly monetary policy review has kept the repo rate or the interest rate that banks pay when they borrow money from the RBI to meet their short term fund requirements, unchanged at 8 per cent.

The reverse repo rate or the interest rate that RBI pays to commercial banks when they park their surplus short-term funds with the central bank, has been adjusted to 7 per cent. The cash reserve ratio (CRR) is left unchanged at 4 per cent. The marginal standing facility rate as also kept unchanged at 9 per cent.

Thus the statuesque in key policy rates mean the equated monthly installments (EMIs) on home, auto and other loans would remain unchanged as these rates determine leading and borrowing rates of commercial banks.

In its first bi-monthly monetary policy review, the RBI did not rule out further rate cut. It is also true that space for further rate cut is remote or little at present. But if the price level declines and CAD continues to decline to the comfortable level then executing further rate cut by the RBI may be reasonably expected in near further.

Monetary and Credit Policy, 2015-16:

On April 7, 2015, the Reserve Bank of India (RBI) announced its Annual Policy statement and first bi-monthly monetary policy for the financial year 2015-16. RBI Governor Mr. Raghuram Rajan presented its policy statement 2015-16 with the aim to maintain stability and growth process.

The Reserve Bank of India, as expected, kept the key policy rate unchanged on fears of unseasonal rains impacting food prices, but hedged banks to lower lending rates while rejecting their contentions that costs of funds remains high.

Highlights:

Following are some of the important highlights of the annual policy statement and first bi­monthly monetary and credit policy, 2015-16:

(i) Short-term leading rate or the repo rate at which the RBI lends to the banking system kept unchanged at 7.5 per cent.

(ii) Cash-reserve-ratio (CRR) too kept unchanged at 4 per cent.

(iii) Bank rate has also been retained at 8.5 per cent.

Promising an accommodative monetary policy, the RBI Governor however indicated rate cuts going forward depending on favourable macro-economic data and whether banks pass on the benefits of two rate cuts so far done this year.

He mentioned that “comfortable liquidity conditions should enable banks to transmit the recent reductions in the policy rate into their lending rates, thereby improving financing conditions for the productive sectors of the economy.” Thus market dynamics will force banks to lower their interest rates.

Thus, the RBI in its current fiscal year’s first bi-monthly credit policy review reflects a very cautious approach with respect to its deal with inflationary expectations. Thus the RBI has kept the repo rate or the interest rate that banks pay when they borrow money from the RBI to meet their short-term fund requirements, unchanged at 7.5 per cent.

It also kept the reverse repo rate or the interest rate that RBI pays to Commercial banks when they park their surplus short-term funds with the Central bank, unchanged.

The cash-reserve ratio (CRR) is also left unchanged at 4 per cent. Thus, the statuesque in key policy rates mean the equated monthly installments (EMIs) on home, auto and other loans would remain unchanged as these basic rates determine lending and borrowing rates of Commercial banks.

Thus, the Reserve Bank of India has legitimately decided that timing of future rate cuts will depend much on how the macro-economy behaves in future and what happens to the inflationary expectations especially at the retail level.