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RBI keeps status quo on policy, wants banks to lower rates

Published On : 09 Feb 2017

Mumbai, (PTI) RBI today kept rates unchanged citing lack of clarity on macro front post note-ban and rising inflationary threat, even as it signalled a possible end to rate-cutting cycle by shunning long-held "accomodative" stance while Governor Urjit Patel nudged banks to make loans cheaper.

Patel-headed six-member monetary policy committee (MPC) unanimously decided to maintain status quo on repo rate for the second time in a row, leaving it untouched at six year-low of 6.25 per cent, so as to "assess how the transitory effects of demonetisation on inflation and the output gap play out."

"The MPC exercised abundant prudence in keeping the policy rates on hold while looking at these transient effects and awaited a clearer and unbiased assessment of inflation," Patel said at his post-policy press meet.

RBI also lowered its current fiscal GDP growth forecast to 6.9 per cent, while expecting a rebound to 7.4 per cent in the next year. In the last bi-monthly policy also, RBI had slashed its growth forecast from 7.6 per cent to 7.1 per cent.

The central bank listed the threats, including rising oil and metal prices and the "stubborn" core inflation at nearly 5 per cent, which make it pertinent to have the flexibility of acting in either directions, while shifting from its two-year "accommodative" policy stance to a "neutral" one that virtually dashes hopes of further cuts in immediate future.

During these two years, as inflation continued its downward journey, the RBI cut its key rates by 1.75 per cent.

Patel, however, was quick to note that there is more room for banks to lower their lending rates saying the weighted average lending rate has come down by only up to 0.90 per cent, while RBI has delivered 175 bps cut since January 2015.

"There is still scope for the lending rates to come down because our policy rates came down by 175 basis points and weighted average lending rates have come down only by 85-90 basis points. I think that there is scope for more transmission," Patel said.

Economic Affairs Secretary Shaktikanta Das also hoped that banks will step up their lending with focus on SMEs, housing and individual loans.

Disappointed with the Reserve Bank's decision to leave key policy rates unchanged, industry leaders, however, said a rate cut was needed to revive demand hit by the cash crunch post demonetisation. They also expressed concern over the apex bank shifting the stance of the monetary policy.

Post-demonetisation, banks had sharply reduced their lending rates based on marginal cost of funds based lending rate (MCLR).

In fact, the MCLR was born in April last year after repeated call by the former Governor Raghuram Rajan went unheeded by bankers to lower rates even after the RBI had done so by 125 bps.

Explaining the rationale for a status quo on the policy front, Patel made it clear that the central bank is committed to achieve its medium-term inflation objective of 4 per cent without giving up on boosting the growth drivers. .


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