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CURRENT AFFAIRS - BANKING Debutants- MPC and Patel make a rocking start with rate cut | 09-Oct-2016 20:26

Debutants- MPC and Patel make a rocking start with rate cut

The first monetary policy review after takeover of the Monetary Policy Committee and the new Governor Urjit Patel has made a 25 basis cut in the policy rate. The repo rate is now brought down to 6.25% - the lowest rate in six years.

The new policy rate decision marks a new era in India’s central banking with the takeover of the monetary policy decision by a body -the Monetary Policy Committee (MPC). It is a half-government and half central bank body – where the RBI Governor enjoys a meager privilege of casting vote.

 Formalities in monetary policy reviews also changed with the new body as the decision notes to be published immediately.

With MPC, the finance ministry can exert considerable influence on the central bank through its appointed nominees. The entire experiment came with the launch of inflation targeting monetary policy framework.

Today’s decision also is the first one for Governor Urjit Patel, who took over from Raghuram Rajan last month.

The MPC has stated that the rate cut is consistent with the overall inflation target of 5 per cent. “The decision of the MPC is consistent with an accommodative stance of monetary policy in consonance with the objective of achieving consumer price index (CPI) inflation at 5 per cent by Q4 of 2016-17 and the medium-term target of 4 per cent within a band of +/- 2 per cent, while supporting growth.”

The Central bank observed that the inflation situation and inflation expectations are conducive for supporting the rate cut.

With the new repo rate, the reverse repo rate is now 5.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate will change to 6.75 per cent.

Does MPC brought any change in monetary policy stance? | 09-Oct-2016 20:01

Does MPC brought any change in monetary policy stance?

The 25 bps rate cut decision made by the new policy governing entity – the Monetary Policy Committee half of whose members are appointed by the Finance Ministry was keenly watched.

There is a tendency to interpret the rate cut as the voice of the Ministry though all the six members agreed for the cut as per the RBI communique.

The leading question is whether the changed institutional format for determining monetary policy decisions played its role in making the rate cut.

Or clearly, whether the decision was caused by the MPC or whether the rate cut was taken in the context of economic situation especially inflationary scenario in the country.

An in-depth analysis can reveal that 60% of factors are supportive of rate cut. CPI inflation rate came down by more than hundred basis points in August though inflation was going up during the previous months.

There is one caution for the cut, that the present fall in inflation was caused by base effect. But the RBI while overcoming the base effect question argued that its expectation about future inflation is that food prices may come down.

The steep fall in inflation during August 2016 could have compelled persons like YV Reddy, Subbarao or Raghuram Rajan for making the rate cut.

The MPC, given its pro-growth mindset has got an opportunistic favorable factor while making the decision. The institution is ready for sacrificing little bit of price stability to reap growth is well understood. But the present situation doesn’t give us a chance to test the mindset of MPC to check how far it is ready to embrace inflation to stimulate growth.

At the same time, the decision reveals one side of the character of MPC. Even when the current inflation (5%) is away from the target rate of 4%, the body may go for a rate cut. This reveals its growth bias in policy setting and an indicator for the future management of monetary policy.

How far inflation scenario supported the present rate cut?

August was the month where retail inflation came down by more than hundred basis point vis a vis the previous year.

The consumer price index (CPI) inflation rate, came down to 5.05% in August 2016 after surging for four-straight months, because of reduce food prices. During the previous year consumer price index stood at 6.07% in July led by continuous rise in food prices.

This means that what propelled the low inflation trend in the previous month was the base effect of low inflation in the base period. A high inflation during the base period may make the current inflation low is the net result of the base effect. This is why the August inflation fell by an unprecedented 100 bps.

The new monetary policy statement also recognizes this base effect.

“In August, however, the momentum of food inflation turned negative and surprised expectations; consequently, base effects in that month came into full play and pulled down headline inflation to an intra-year low.”

The fall in inflation during august 2016 came after four month’s consecutive rise in CPI.

Now the question is whether such a base effect warrants a rate cut from the pure monetary policy angle. On this the RBI defended that it expects further ease in food inflation in the coming months. For it, expectations about fall in food prices had "opened up space for policy action."

Now the future low food inflation prospects have driven the current rate cut. Here, responsibility is big in front of the government to avert any food price shock. Credibility of the present decision rest on low food price realization.

RBI asks banks to provide loans to women self-help groups in rural areas at 7% per annum | 27-Aug-2016 14:06

RBI has asked banks to provide loans to women self-help groups in rural areas at 7 per cent per annum, as per the government's revised guidelines for the current financial year.

The Reserve Bank said in a notification that all women self-help groups (SHGs) will be eligible for interest subvention on credit up to three lakh rupees at 7 per cent per annum under the Deendayal Antyodaya Yojana - National Rural Livelihoods Mission in 250 districts.

It said, SHGs availing capital subsidy under the Swarnajayanti Gram Swarozgar Yojana in their existing credit outstanding will not be eligible for benefit under this scheme.