RBI warns of soaring inflation, slams farm loan waiver

Shiv Kumar
Tribune News Service
Mumbai, April 6

The Reserve Bank of India (RBI) on Thursday left the key repo rate unchanged at 6.25 per cent even as it raised the reverse repo by 25 basis points to 6 per cent during its policy review meet even as it warned of inflation rates looming over the next six to 12 months.

The increase in reverse repo is expected to allow the central bank suck out cash from banks and thus reduce liquidity in the system. Banks are awash with cash following demonetisation of high-value currency notes in November last year.

The central bank projected inflation to average 4.5 per cent during the first quarter of 2017-18 and rise to 5 per cent afterwards.

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“Underlying inflation pressures persist, especially in prices of services. Input cost pressures are gradually bringing back pricing power to enterprises as demand conditions improve,” the RBI said in its statement.

The central bank also pointed out that a weak monsoon and increase in dearness allowance for government employees apart from implementation of the goods and services tax (GST) could impact prices in the near term.

“The uncertainty surrounding the outcome of the southwest monsoon in view of the rising probability of an El Nino event around July-August (would have) implications on food inflation,” the RBI said.

The series of measures announced by the central bank includes allowing banks to invest in real estate investment trusts (REITs), raising the minimum fund requirements of asset reconstruction companies (ARCs), allowing collateral substitution under repo that will give banks more funds to lend, and proposing the introduction of standing deposit facility (SDF)—another window for banks to borrow.

“The Securities and Exchange Board of India (SEBI) has put in place regulations for REITS and InvITs and requested the Reserve Bank to allow banks to participate in these schemes. Currently, banks are allowed to invest in equity-linked mutual funds, venture capital funds (VCFs) and equities to the extent of 20 per cent of their NOF. It is proposed to allow banks to invest in REITS and InvITs within this umbrella limit,” the RBI statement said.

The central banks will announce detailed guidelines on this by end-May 2017.

The RBI said the Indian economy is fast rebounding from the impact of demonetisation. “Activity in cash-intensive retail trade, hotels and restaurants, transportation and unorganised segments has largely been restored.”

Patel slams farm loan waiver

At the press conference after announcement of policy review, RBI Governor Urjit Patel said political parties must evolve a consensus whereby farm loan waiver promises are avoided in the election campaigns.

“A farm loan waiver undermines an honest credit culture and discipline....It engenders moral hazard and entails transfer from tax payers. There’s a need to create consensus that farm loan waiver promises are eschewed,” Patel said.

The RBI governor said farm loan waivers would also suck out funding from the banking system and thus crowd out private borrowers.

Highlights

Following are the highlights of the first bi-monthly monetary policy for 2017-18 as announced by the RBI:

*Policy repo rate unchanged at 6.25%, hikes reverse repo to 6%

*Narrows policy rates corridor due to increased liquidity, post demonetisation

*Pegs GVA growth for current fiscal at 7.4% as against 6.7% last year

*Revises MSF, bank rate to 6.5%

*Retail inflation in first half seen at 4.5%, 5% in second half

*Economic indicators point to modest improvement in microeconomic outlook

*Risk evenly balanced around inflation trajectory; upside risk from uncertainty about monsoon

*Upside risk to inflation from GST, poor monsoon, pay commission award

*Further scope for a more complete transmission of policy rates remains, including for small savings rates

*All six MPC members voted in favour of RBI monetary policy

*The next meeting of the Monetary Policy Committee on June 5 and 6. With PTI