MUMBAI: The imagery of inflation has changed to a “horse which has been brought to the stable” in the latest monetary policy statement on Wednesday, from an “elephant which is taking time to walk to the forests” in the last three editions. But Reserve Bank of India Governor Shaktikanta Das was quick to warn that the horse has to be kept under a tight leash so that it does not go out of control.
While Das made light of the imagery in his post-policy press conference, the more substantive change came from the softening of the policy stance from ‘withdrawal of accommodation’ to ‘neutral’, setting the stage for the first interest rate cut in four years. Many economists expect the rate cut to come as early as December this year. Bond and equity markets were relieved.
The monetary policy committee (MPC) voted five-to-one to keep the benchmark repurchase rate at 6.5% on Wednesday, with new external member Nagesh Kumar voting in favour of immediate reduction. The change in stance to neutral was a unanimous decision.
The committee noted that both growth and inflation are well-balanced, though the trajectory of the latter has been slow and uneven. Both growth and inflation projections have been kept unchanged at 7.2% and 4.5%, respectively. While there are expectations that the inflation will remain elevated in the near term due to adverse base effect, food inflation is likely to ease in the future due to strong kharif sowing, adequate buffer and good conditions for rabi sowing.
Das said the prevailing and expected inflation-growth balance have created congenial conditions for a change in monetary policy stance to neutral, but struck a note of caution, “Even as there is greater confidence in navigating the last mile of disinflation, significant risks – I repeat significant risks – to inflation from adverse weather events, accentuating geopolitical conflicts and the very recent increase in certain commodity prices continue to stare at us. The adverse impact of these risks cannot be underestimated,” he said. The central bank’s “focus will be on the near term hump,” Deputy Governor Michael Patra added.
The markets reacted well to the policy with the 10-year bond yields falling by 4 basis points to close at 6.77%. Intra-day, it fell by 7 bps to 6.74% – the lowest since September 26. The equities market, which was up for most of the day, fell in the last hour. The Sensex closed at 81,467 points, down 168 points or 0.21%.
Economists and bankers believe the RBI seems to be sequencing its moves carefully, starting off with a softening of stance on Wednesday. “We believe the next move will be a 25bp rate cut in the December meeting,” wrote Pranjul Bhandari, Chief India and Indonesia economist at HSBC.
Abheek Barua, Chief Economist, HDFC Bank, believes that the RBI has acknowledged the durable disinflationary trend underway although highlighting lingering domestic and global risks – signalling future rate action would be data dependent. “Given this, if conditions evolve favourably over the coming months, a December rate cut is not off the table,” said Barua.
State Bank of India Chairman C S Setty said that the shift in stance to neutral is an affirmative front loaded policy move that will ensure RBI remains nimble footed to align inflation with the 4% target, while Zareen Daruwala, CEO, India and South Asia, Standard Chartered Bank, said the change in stance stemmed from the MPC’s confidence in reining inflation within its target range. This should also bring cheer to the markets as it is likely to serve as a precursor to rate cuts.
Among other measures, the apex bank proposes to come out with consultation paper on removal of foreclosure charges and pre-payment penalties on loans taken by micro and small enterprises. It also plans to issue a discussion paper on providing flexibility in capital raising avenues for urban co-operative banks. To plug data gaps due to risks emanating from climate change, it proposes to create a data repository. “The creation of RBI climate risk information system will standardise datasets related to climate and bring them at one platform. This repository will also help the regulated entities to fine tune their transition risk assessment models,” added Setty.
In addition, limits for UPI have been increased from Rs 5,000 to Rs 10,000. Similarly, for the UPI Lite wallet from increase the UPI Lite wallet limit from Rs 2,000 to Rs 5,000 and per-transaction limit from Rs 500 to Rs 1,000. In another move, RBI proposes to extend the facility of verifying the beneficiary before executing a transaction, as in the case of UPI and IMPS, to NEFT and RTGS. This will also reduce the possibility of wrong credits and frauds.
Source: The Financial Express
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