The six-member monetary policy committee (MPC)Today decided to keep its short-term lending rate -- repo rate -- unchanged at 5.15 % in the sixth bi-monthly policy review of the ongoing financial year.
RBI maintained its accommodative stance to assist growth and said there is policy space available for future actions.
All 6 committee members voted in favor of the status quo. In December month, all members had voted in favor of keeping rates steady.
"The path of inflation is, however, elevated and on a rising trajectory through March quarter. The outlook for inflation is highly uncertain at this juncture," the central bank noted.
Inflation forecast revised upward
The central bank raised its CPI inflation forecast for March quarter to 6.5 % and for the first half of FY21 to 5-5.4 %. It pegged FY21 GDP growth at 6 % against 6-6.5 % estimated by the Economic Survey released on January 31.
Governor Shaktikanta Das said that growth in CPI inflation in December would have been 5.2 % if it were to exclude higher onion prices. Government spending, Das said, is providing countercyclical support to growth.
The RBI has crafted a fine balancing act of reconciling the requirements of growth with stability, said Joseph Thomas, Head of Research at Emkay Wealth Management.
"At this juncture, rate modification is actually not required as the interbank market has a huge surplus of close 3 lakh cr Rs to support the liquidity requirements of the system," he said.
RBI said the actual inflation for tired quarter at 5.8 % overshot projections by 70 basis points, primarily due to intensification of the onion price shock in December on account of unseasonal rains in October-November.
Other means to revive growth
The RBI governor said that RBI's policy rate and stance retention should not be seen as a pointer for future MPC decisions, adding that the apex bank can revive growth via means other than monetary policy.
Das said the central bank will remain vigilant to the potential generalization of inflation. Policy transmission to the credit market is gradually improving while investment outlook is also showing signs of improvement, Das said.
Data showed that the CPI inflation stood at 7.35 % in January, which was highest in 6 years, and above MPC’s target band of 2-6 %.
Das said that CRR leeway on new consumer loans will be applicable until July 31.
BofA-ML expects inflation to fall to 6.7 % in January, which should still be above RBI’s comfort level. Others do not expect it to fall below 6 % anytime meaningfully before September.
Relief measures for commercial developers
Meanwhile, RBI said that it will not downgrade commercial real estate loan if the delay is genuine. It will in line with the treatment accorded to other project loans for the non-infrastructure sector.
“It has been decided to permit extension of date of commencement of commercial operations (DCCO) of project loans for commercial real estate, delayed for reasons beyond the control of promoters, by another one year without downgrading the asset classification,” RBI said.
The detailed instructions will be issued shortly, the apex bank said.
The development would complement the initiatives taken by the government to revive the real estate sector.
The RBI also said it will issue revised regulations for housing finance companies (HFCs ) by the end of February.
Till such time HFCs will continue to comply with the directions and instructions issued by NHB, it said.
Since August 9, 2019, the regulation of HFCs comes under the RBI. The RBI is carrying out a review of the extant regulatory framework applicable to HFCs.
Banks' net interest income likely to go up
The central bank said that commercial banks will be allowed to deduct the equivalent of incremental credit disbursed by them as retail loans for automobiles, residential housing and loans to micro, small and medium enterprises (MSMEs), from their net demand and time liabilities (NDTL) for maintenance of cash reserve ratio (CRR).
RBI said "The deductions will be over and above the outstanding level of credit to these segments as at the end of the fortnight ended January. This exemption will be available for incremental credit extended up to the fortnight ending July 31".
Moreover, the apex bank has decided to link the pricing of loans by all commercial banks for the medium enterprises to an external benchmark, effective by 1st April.
Another positive step for banks is the introduction of LTRO – Long term Repo operation for 1 year and 3-year durations to the extent of 1 lakh cr Rs.
Link credited to medium industries to an external benchmark, removal of CRR requirement on fresh retail housing and auto loans and credit to MSME is in positive steps. These steps may marginally reduce the interest rates on such fresh loans. Sujan Hajra said, (Chief Economist at Anand Rathi Shares) the removal CRR select loans (15% of bank’s outstanding loan book) also likely to give a temporary boost to the bank’s net interest income.”
Mr. Mihir Vora said, (Director & Chief Investment Officer at Max Life Insurance) the introduction of LTRO will ensure durable liquidity to banks and enable them to lend at competitive levels.
Improvement in macro data
The rate pause came in the wake of improvement in macro data readings.
The manufacturing PMI has been on an uptrend over the past few months, improving from 51.2 in November to 52.7 in December and further to 55.3 in January 2020, which is broadly supportive of manufacturing recovery. India services PMI also hit a 7-year high of 55.5 in January from 53.3 in December. A value is above 50 suggests expansion inactivity.
On the other hand, growth in core infrastructure in industries rose by 1.3 % in December after declining for four months.
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