Published: Mon, June 12, 2017
Markets | By Erika Turner

Ahead of RBI meeting, Jaitley makes case for rate cuts

Ahead of RBI meeting, Jaitley makes case for rate cuts

The decision was taken after the Monetary Policy Committee (MPC), headed by RBI Governor Urjit Patel, meeting.

Hence it was more prudent that the Monetary Policy Committee (MPC), which decides on rate action, made a decision to keep the repo - the rate at which the central bank lends to commercial banks - unchanged at 6.25 percent. GST is created to bring goods and services that today escape taxation into the tax net and there is bound to be a one-time bump in inflation, when indirect tax collections rise.

The RBI maintained its neutral policy stance, asserting that it would "remain watchful of incoming data" as it needs to gauge "whether or not the unusually low momentum in the reading for April will endure", stated Franklin Templeton Investments in its note on second RBI Bi-Monthly Monetary Policy Review FY18.

Gloves were off between RBI and the government today after the central bank left key interest rate unchanged, leaving the finance ministry fuming as it felt that inflation was consistently low warranting a rate cut.

The central bank cut the statutory liquidity ratio (SLR) - the proportion of deposits that banks have to invest in government securities - to 20 per cent of deposits from 20.5 per cent.

"Acknowledgment of recent weak data on growth and inflation by the RBI opens up the possibility of a rate cut in August", said Bloomberg Intelligence's India Economist Abhishek Gupta.

The easing of inflation excluding food and fuel may be transient in view of its underlying stickiness in a situation of rising rural wage growth and strong consumption demand, it said. In October, Patel cut rates even though a majority of economists were expecting him to stand pat. However, the CPI inflation for April 2017 saw a sharp drop to 2.99% vs. 3.89% in March 2017; this seems to have resulted in the RBI projecting a lower inflation going ahead.

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At the current juncture, global political and financial risks materialising into imported inflation and the disbursement of allowances under the 7th central pay commission s award are upside risks, it said. "Core inflation has also declined sharply". "Overall, the RBI has a strategy to deal with the resolution of large assets and we are working in a calibrated manner and we hope to see some actions coming soon", Deputy Governor NS Vishwanathan said.

Bonds gained, with the benchmark 10-year bond yield down 2 basis points to 7.44 percent from its previous close, while the broader NSE share index rose up 0.2 percent. The Government intends to roll out GST from July 1.

The pace of rate cuts has been a bone of contention between the RBI and the government for quite some time now, thanks to their different viewpoints about economic conditions and the strength of inflationary pressures.

Finance Minister Arun Jaitley had said inflation has been under control for long and is likely to remain so on the back of good monsoon and unlikely spike in oil prices.

It also chose to reduce the standard asset provisioning rate on such loans from 0.40 per cent to 0.25 per cent.

"April inflation print and revised growth estimates have certainly raised hard policy questions".

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