RBI turns cautious amid inflation, keeps interest rate unchanged at 4%

RBI expects headline inflation to remain elevated in the second quarter of 2020-21. It also sees real GDP shrinking in the first half as well as the full year.

File photo of the Reserve Bank of India | Photo: Suraj Singh Bisht | ThePrint

Mumbai: The Reserve Bank of India’s six-member monetary policy committee (MPC) has decided to keep interest rates unchanged at 4 per cent in its review meeting Thursday, citing inflation concerns.

While holding the repo rate, the committee decided to maintain the accommodative stance.

All members of the panel voted for keeping the interest rate on hold.

“The MPC noted that in India too, economic activity started to recover from the lows of April-May… However, surges of fresh infections have forced re-clamping of lockdowns in several cities and states. Consequently, several high frequency indicators have levelled off. Inflation pressures were evident in all sub groups,” RBI Governor Shaktikanta Das said while announcing the MPC’s decision.

In the last two policy meetings, in March and May, the central bank had reduced the repo rate twice by a total of 115 bps. One percentage point equals 100 bps.

The average consumer price index (CPI)-based inflation was over 6 per cent for the two consecutive quarters, January-March and April-June. The MPC’s mandate is to maintain inflation at 4 per cent, within a band of +/- 2 per cent. The central bank is answerable to Parliament if it misses the inflation target for three consecutive quarters.

The transmission of monetary policy rates to lending rates has been slow, shows RBI data. The weighted average lending rate on fresh rupee loans for scheduled commercial banks declined 47 bps — from 8.82 per cent to 8.35 per cent — between March and June, in response to a 115 bps reduction in the repo rate during the same period.

Outlook on inflation and growth

Sounding caution on inflation, Das said the MPC expects headline inflation to remain elevated in the second quarter of 2020-21 and likely to ease in the second half of the fiscal.

In its last two policy statements, the central bank hadn’t predicted quarterly inflation numbers, which was a departure from the past practice. On Thursday too, the RBI refrained from projecting inflation numbers.

“Supply chain disruptions on account of Covid-19 persist impacting both food and non-food items. Upside risks to food prices remain,” said Das.

A more protracted spread of the pandemic is one of the key downside risks to growth, he said, adding that real GDP is expected to contract in the first half. For the full year too, economic growth is expected to be in the negative zone.

The RBI had refrained from predicting growth in the last two policies as well, citing uncertainties due to the Covid-19 pandemic.

During the May policy review, the RBI governor had said economic growth is estimated to be in the negative territory for 2020-21, with some pick-up in growth impulses from the second half of the fiscal.

On rate cut

While holding interest rates, the central bank indicated that there would scope for further rate cut in the future to support economic growth.

The MPC noted that in an environment of unprecedented stress, supporting recovery of the economy assumes primacy in the conduct of monetary policy. “While space for further monetary policy action is available, it is important to use it judiciously to maximise the beneficial effects for underlying economic activity,” Das said.

Economists expect further rate cut from the central bank as soon as the headline CPI inflation falls back to 4 per cent.

“While it [RBI] reiterated that space is available for future monetary policy action, the emphasis that it should be used judiciously suggests that the space is limited. Accordingly, we expect only one more rate cut in Q3 FY2021, the timing of which will be guided by how quickly the headline CPI inflation reverts to 4%,” said Aditi Nayar, principal economist, ICRA.

Debt recast

The central bank also announced the much anticipated one-time restructuring of loans while prescribing a 10 per cent provision. This means banks have to set aside capital to the extent of 10 per cent of the outstanding debt. Banks are otherwise required to make a provision of 15 per cent while restructuring a loan.

For corporate borrowers, debt recast has been allowed for loans which are standard and not in default for more than 30 days, as on 1 March. A loan becomes sub-standard, which is the first category of non-performing asset, if payment is overdue for over 90 days.

“The resolution plan may be invoked anytime till December 31, 2020 and shall have to be implemented within 180 days from the date of invocation. Lenders shall have to keep additional provisions of 10 per cent on the post-resolution debt,” the RBI said.

The central bank will set up an expert committee under the chairmanship of veteran banker K.V. Kamath to recommend on the required financial parameters, along with the sector-specific benchmark ranges.

For personal loans, resolution is allowed until 31 December, and needs to be implemented within 90 days thereafter.

Importantly, the regulator said banks can design the contours of the plan based on board-approved policies, subject to extension of the residual tenor of the loan, with or without payment moratorium, by a period not more than two years.

State Bank of India Chairman Rajnish Kumar said the RBI has carefully addressed the concerns emanating from the wider market participants.

“…The RBI has addressed the need to offer some form of restructuring facility for standard accounts that are facing difficulty in debt restructuring,” he said.

“We welcome the fact that a new Resolution Framework for Covid-19-related Stress facility has been extended to large corporate, SME and personal loans with necessary safeguards in each segment,” said Kumar, who is also the chairman of the Indian Banks’ Association.

Gold Loan

The regulator also decided to increase the loan to value ratio for gold loans to 90 per cent from 75 per cent, with a view to mitigate the economic impact of the pandemic on households, entrepreneurs and small businesses. The relaxation will be available until 31 March 2021.

Bankers said the move will increase demand for gold loans and help them grow their loan book.

“This will put more money in the hands of the borrower. While this move will help broaden the gold loan market, we will also witness an increased competition in this segment,” said Catholic Syrian Bank managing director and chief executive C.V.R. Rajendaran.