RBI Monetary Policy Review on December 1, Rates Likely To Remain Unchanged

The Reserve Bank of India (RBI) on December 1 (Tuesday) will come out with its fifth bi-monthly monetary policy review and is more likely to keep the policy rates unchanged, ahead of chances that US Fed may hike the interest rates.

In the last review policy on September 29, RBI Governor Raghuram Rajan said, “The coming Pay Commission report could add substantial fiscal stimulus to domestic demand, but the government has reaffirmed its desire to respect its fiscal targets and improve the quality of its spending. Under these circumstances the Reserve Bank intends to be accommodative to the extent possible, therefore the Reserve Bank has frontloaded policy action by a reduction in the policy rate by 50 basis points.”

The whole issue of rupee stability in the backdrop of chances that US Fed may raise the interest rates, would influence the monetary policy and the industry must be prepared for the unfolding events, said the Associated Chambers of Commerce and Industry of India (Assocham) in a pre-policy note.

Fast changing geo-political situation in the Middle East and the increased terror threat with consequent economic costs will surely weigh on the RBI’s policy stance which is not expected to give any more cut in the interest rates in the ensuing review, Assocham pointed out.
Conceding that RBI may not be able to go in for any further cut in the policy rates in the ensuing review, the Assocham has impressed on the central bank to ensure that transmission of the rate easing is done by the lenders within a set framework of guidelines.

While the RBIs wants the banks to do much more and pass on the substantial easing of rates to the borrowers, the banks have not been showing the similar zeal citing different technical reasons and retained good part of the cut in the repo rates.

Given this background, RBI wants the banks to move to 'marginal cost' principle in fixing their lending rates. It is likely to notify the new guidelines to this effect. This should, over time, improve monetary policy transmission, the industry body said.

As for policy rates, no reduction is expected, given the 'front-loaded' rate cut in September 2015 and the incrementally modest transmission of past easing. Additionally, uncertainty related to the monsoon and efficacy of food management in 2016 and the impact of the impending pay revision for Government employees pose key risks to the achievement of the RBI's target of containing CPI inflation below 5 per cent by fourth-quarter of FY2017.

Besides the interest rates, the main concern before the Indian economy at the macro level is an ‘unsustainable proportion’ of the non-performing assets (NPA) and the loans under stress, which according to different estimates have reached up to 15 per cent of the bank advances.

RBI has already initiated a number of steps for easing of NPAs in the infrastructure sector a close monitoring is required along with the government to make sure that some of the projects in the highway sectors are brought back to the standard assets, they quoted.

In fact, there have some encouraging examples where with the banks showing some pragmatism, the projects have been restored to health generating a positive sentiment around the promoters, their stocks in the market and the commensurate investor confidence, the chamber stated.