MUMBAI,MANOJIT SAHA:Reserve Bank of India (RBI) Governor Raghuram Rajan cited the April retail inflation “surprise” as the key factor that prompted the central bank to leave interest rates unchanged on Tuesday.
“The net effect is we have put a little more weight on upside risks” to inflation expectations, Mr. Rajan told reporters at a post-policy media briefing.
The central bank chief said the RBI was also committed to providing liquidity as required by the banking system and observed that the Centre could also aid credit flows through a timely infusion of capital into “constrained” public sector banks.
“Notwithstanding increased uncertainty around inflation projections, the RBI maintained its “accommodative” monetary policy stance,” economists at Citigroup India wrote in a note to clients. The central bank has retained its 5 per cent inflation projection for March 2017.
Abheek Barua, Chief Economist at HDFC Bank, said he saw a possibility of another 25 bps rate cut in 2016-17 if monsoon rains were normal and commodity prices stayed stable.
On growth, the central bank said some high frequency indicators for April point to a firming recovery, although it is still uneven.
The central bank said the transmission of the monetary policy as well as timely capital infusion in the banks remained critical for growth to revive. Banks have been reluctant to cut lending rates which prompted the central bank to ask banks to shift to a new loan pricing mechanism — Marginal Cost of funds based Lending Rate (MCLR) from April. Mr. Rajan said the RBI will review the implementation of the new framework .
The RBI also said there could be outflows of about $20 billion once the foreign currency non-resident (bank) deposits, which were garnered during the 2013 currency crisis, mature.
While the RBI has covered those requirements in the forward markets, Mr. Rajan said there could still be a shortage of dollars and assured market participants of dollar supply in case of extreme volatility.
He however warned that the supply of dollars by the central bank should not be taken ‘for granted’.
“The reassurance that the RBI stands ready to mitigate any financial volatility resulting out of FCNR deposit maturities due later this year is very welcome,” said Chanda Kochhar, Managing Director and CEO, ICICI Bank.
On the issue of cleaning up of banks’ balance sheets, Mr. Rajan reiterated that the central bank will not reconsider any kind of regulatory forbearance.
He said the RBI is in discussion with the government to facilitate flow of credit to projects with appropriate capital structures.