RBI Keeps Key Rates Unchanged in June Monetary Policy Meeting
Reserve
Bank of India (RBI) today decided to keep the repo rate unchanged at 6.25% while
cutting Statutory Liquidity Ratio (SLR) by 50 basis points to 20%. Next review
is set to take place in August 2017
The RBI announced
its bi-monthly policy decision at 2.30 PM today, 7th June 2017.
While most policy experts correctly predicted a status quo outcome leaving the
key rates unchanged, some others predicted a small rate cut given the historically
low inflation levels India is facing. Here’s a look at the three prospective
outcomes and what it means to the average consumers:
Key rates unchanged: Here
the key lending rates will remain unchanged and therefore disruption caused
will remain minimal. The Repo rate at 6.25% will imply that the money in the
system will remain relatively stable. Cost of borrowing will neither get
cheaper nor more expensive implying that status quo will be maintained. Price
of goods and services will remain relatively stable, at least from the
macroeconomic perspective. This can also be termed as the ‘wait and watch’
approach give that the RBI remains undecided on what cues for or against will
decide the future monetary policy.
Rate cut: RBI took the
bold decision post demonetization of keeping the key rates unchanged. While
criticized at first, it turned out to be an inspired move given that the
previous rate cuts carried out by the RBI had not entirely trickled down to the
consumer, given that many banks in India have NPA problems which need to be
serviced through interest payments. However, the chorus for a rate cut has
grown strong once again, given that liquidity in the system is low post
demonetization. This is a policy decision for spenders, not savers, as interest
on bank deposits will fall as will the cost of borrowing. Therefore, consumer
durables, FMCG, automobiles and other such sectors such as infrastructure, that
usually require financing from banks, stand to gain.
Rate hike: It is highly
unlikely that RBI will go for a rate hike because, as mentioned before,
liquidity in the system is less as are inflation levels. However, if the case
does arise, this will be a boon for savers as interest on bank deposits will
rise. Capital expenditure will go down, given that loans will become more
expensive, as will spending on gold, investments, durables and other relatively
expensive goods. The shrewd shopper will wait for an RBI rate cut, in this
case, before financing expensive items for purchase. There can be a case made
for a future rate hike, if the RBI moves to pre-empt any creeping inflation,
but it may be too early to warrant such a hike this early into 2017-2018.
RBI chose to go
with the option of keeping key rates unchanged and cutting SLR by 50 basis
points. What this means is that while borrowing and lending costs, and interest
rates offered by banks on deposits remain the same, banks are allowed to hold
less liquidity reserves than previously needed. This all points towards the RBI
keeping in mind the sub 4% inflation levels witnessed by the country. With
cheaper oil imports and a weakening dollar both putting opposing pressures on
the RBI, with cheap oil softening India’s inflation levels and a weak dollar
leading to exchange outflows which will raise inflation levels, on the whole
RBI has decided to adopt the middle path. However, this puts the onus on RBI to
act decisively on regional and global cues in August 2017 post GST
implementation.
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