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By Ruma Dubey

It was largely as expected – RBI kept all rates unchanged. The media called it a non-event, started talking immediately about rate cuts at the next policy scheduled for 7th Feb,2018 and moved on. For the market, this event is over and it needs the next fix and then the next….

But the crux remains – RBI alone cannot salvage the market and the economy. It can only aid policy actions taken by the Govt.  The climbing retail inflation and the continuing sluggish growth had shown us the way in which the policy would move today. No one truly expected a rate cut, which is why the markets also did not react much to the RBI policy; for the markets the policy is over; the fall had nothing to do with the policy per se as it had nothing new to offer! Global overhang, the seasonal unwinding in December and lack of any other trigger is pulling rhe indices down now.

But what got the market a bit spooked is that the RBI has slightly increased its inflation target while keeping its growth target unchanged. October bi-monthly statement projected inflation to rise and range between 4.2-4.6 per cent in the second half of this year, including the impact of increase in house rent allowance (HRA) by the Centre. And in today’s policy, inflation is estimated in the range 4.3-4.7 per cent in Q3 and Q4 of this year, including the HRA effect of up to 35 basis points.

People lament that RBI is concerned only about inflation and is not paying attention to growth rates. But that is precisely what the RBI is supposed to do – its prime objective is to issue bank notes, formulate, implement and monitor monetary policy, maintain price stability and ensure that there is adequate liquidity in the system.  So it is doing its duty well. Thus to blame RBI for all the economic woes today is wrong.

A quick look at the highlights of the policy:

  • Policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.0 per cent.
  • Reverse repo rate under the LAF remains at 5.75 per cent.
  • Marginal standing facility (MSF) rate and the Bank Rate at 6.25 per cent.
  • The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.
  • Inflation is estimated in the range 4.3-4.7 per cent in H2FY18.
  • Projection of real GVA growth for 2017-18 of the October policy at 6.7 per cent has been retained.
  • Surplus liquidity in the system has continued to decline during October and November. Currency in circulation increased by Rs.736 billion in Q3 (up to December 1, 2017) over end-September on festival demand.
  • The next meeting of the MPC is scheduled on February 6 and 7, 2018.

The RBI’s outlook for the future growth is positive and this is based on three factors – firstly, capital raised from the primary capital market has increased significantly after several years of sluggish activity. As the capital raised is deployed to set up new projects, it will add to demand in the short run and boost the growth potential of the economy over the medium-term. Secondly, the improvement in the ease of doing business ranking should help sustain foreign direct investment in the economy. Thirdly, large distressed borrowers are being referenced to the insolvency and bankruptcy code (IBC) and public sector banks are being recapitalised, which should enhance allocative efficiency. However, the RBI notes that the impact of these factors can be buttressed by reducing the cost of domestic borrowings through improved transmission by banks of past monetary policy changes on outstanding loans. Thus the onus is on the banks to reduce rates as RBI has done what it needs to do.

RBI has neither any elections to win nor any politics to play which is why it is what it needs to do.  The onus, like always lay on the Govt. It needs to do much more – not just public spending, speeding up approvals for projects but it needs to address the issue of rising fiscal deficit and sluggish growth.

So what’s the next trigger for the markets now?  The US Federal Open Market Committee is meeting on the 13th of December, which is next Wednesday night. And prior to that, the IIP numbers scheduled for 12th Dec.  Over and above all this, the overhang of the election outcome.  Last month of the year, lets see where we close 2018.

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