Mumbai, February 8, 2017

Adds, MPC exercised prudence in keeping policy rates on hold while looking at all transient effects

The Reserve Bank of India (RBI) on Wednesday said lack of clear data post-note ban prevented it from delivering a widely expected rate cut, while global cues that may push up prices, stubborn core inflation and the need for flexibility forced the central bank to adopt neutral stance from being accommodative.

"The Monetary Policy Committee (MPC) exercised abundant prudence in keeping the policy rates on hold while looking at these transient effects and awaited a clearer and unbiased assessment of inflation. The MPC is dedicated to achieving the 4 per cent headline CPI inflation target while keeping in mind the objectives of growth," Governor Urjit Patel told reporters in the customary post-policy presser.

The governor said data have been "clouded" after demonetisation, leading to difficulties in having a clear assessment of the macroeconomic situation post-November 8.

On the shift of the policy stance from accommodative to neutral, which dashes hopes of future rate cuts, newly- inducted Deputy Governor in charge of monetary policy committee Viral Acharya said there is a fear of hardening of oil and base metal prices globally which makes the RBI shift its stance.

Patel pointed out that even though the headline inflation has cooled off to 3.4 per cent in December, the non- fuel/non-food inflation core inflation continues to be "stubborn" at over 4.8 per cent.

"The committee felt that we needed all the flexibility that we could muster," Patel said.

It can be noted that the RBI had in January 2015 shifted to an accommodative stance with a surprise 25 bps rate cut ahead of the Budget and has since then delivered 1.75 per cent of rate cuts.

Despite the recent rate cut announcements, Patel said there is more scope for banks to cut their lending rates for borrowers, pointing out that the weighted average lending rate has moved down by only 0.85-90 per cent till now.

Meanwhile, on the American policy front, Patel said clarity on the fiscal policies is awaited.

RBI Executive Director Michael Patra, who is also a member of the six-member MPC, said the real interest rate continues to be in the 1.25-1.75 per cent band and the RBI expects the situation of excess liquidity to ease out soon.

On the asset quality front, Deputy Governor S S Mundra said there is an improvement but the higher provisions have dented the net profits of the bank and the same should continue being under pressure for some time.

He said quite a few banks will have to raise capital to meet the minimum buffer requirements soon.

[The Business Standard]