RBI Monetary Policy: Governor Urjit Patel Targets Kickstarting Investment Cycle

The Reserve Bank of India (RBI), on Wednesday, announced a 25 basis point (one basis point is 1/100th of a percentage point) cut in the key Repo and Reverse Repo rates whilst maintaining its ‘Neutral’ monetary policy stance. The decision entailed a 4-2 split between the six-member  Monetary Policy Committee (MPC).

Addressing the news conference after the policy statement’s announcement, RBI Governor Urjit Patel said that the ‘normal monsoon’, smooth rollout of the GST, and low inflation excluding fuel and food made this an opportune time for a rate cut

RBI Governor’s Expansive Line

Taking perhaps the most expansive line yet since becoming RBI Governor, Patel emphasised the need to provide a stimulus for growth by kickstarting private investment. On multiple occasions he spoke about removing infrastructure bottlenecks, in particular, for clearance of housing projects by state governments. He also clearly feels that the Government’s affordable housing scheme could be a big driver of growth and that the environment has to be created for it to take off. These, along with recapitalising banks and solving the twin balance sheet problem — that corporates’ balance sheets are encumbered by unsustainable debt and banks’ balance sheets are heavy on bad loans — were the main focus areas of the RBI in Wednesday’s review.

For the first time in a long time, terms such as ‘foreign factors’ and ‘global scenario’ found minimal mention. Instead, the main uncertainties had to do with factors such as the timing of salary hikes by state governments, porting to GST and the implementation of the farm loan waivers by several states. Urjit Patel is not a fan of farm loan-waivers and had slammed the concept at an earlier review. He does, however, have confidence in the agriculture industry, mentioning that the outlook for the sector is ‘robust’. On the other hand, he’s not so upbeat about the projections for industry and services.

Here is the MPC’s take on some key topics –

Neutral stance: While the rates have been cut, the committee decided to stick to its ‘neutral’ stance as the trajectory of inflation is projected to be on the rise from the current low.

Liquidity and Demonetisation: Liquidity in the market continues to be high, primarily as a result of demonetisation. Deputy Governor Viral Acharya said that the remonetisation process has reached a point where the currency in circulation is reaching a normal level. The RBI is monitoring the remonetisation closely and accordingly, taking decisions over ways to mop it up using the toolkit at its disposal.

On Transmission of Rates: The MPC spoke about how due to the excess liquidity in the market and the RBI’s own monetary easing, there is scope for the rate cuts to be transmitted, especially in areas such as new housing loans. In some other areas the transmission has been lower, the MPC said, with Viral Acharya adding that a system is being developed which may more closely link key rate cuts with banks’ lending rates.