oppn parties RBI Keeps Repo Unchanged, Fears Inflation Ahead

News Snippets

  • Imran Khan raises nuclear war bogey again, says if Pakistan loses a conventional war, it might fight till the end with its nuclear arsenal
  • Searching for Rajeev Kumar, ex-CP, Kolkata Police, the CBI approaches state DGP to know about his whereabouts
  • Ferry overturns in the river Godavari in Andhra. 46 feared dead
  • Supreme Court to hear pleas on Jammu & Kashmir today
  • Ghulam Nabi Azad moves Supreme Court for ordering the government to allow him to visit his family in J&K
  • GST Council meeting to focus on leakages and evasions, expected to tighten processes, especially regarding input tax credit
  • Finance minister, citing figures for July 2019, says that industrial production and fixed investment is showing signs of revival
  • Amit Shah's comment on Hindi as the unifying language draws the ire of MK Stalin and Siddaramaiah. Stalin says the country is India not Hindia
  • On Hindi Diwas today, Amit Shah says use of mother language must be increased but Hindi should be adopted as the common language of the country
  • Pakistan raises white flag on LoC to claim bodies of dead soldiers
  • India beat Bangladesh by 5 runs to lift the U-19 Asia Cup
  • A three-judge bench of the Supreme Court will examine the amendments to the SC/ST act made after an apex court order that 'diluted' the provisions and which were reinstatd by the amendment
  • Delhi government decides to re-implement the odd-even system of traffic management from November 4 to 15
  • UP to discontinue law that allows the state government to pay the income tax dues of ministers
  • Anand Sharma of the Congress to replace P Chidambaram on the parliamentary committee on home affairs
Sunni Wakf Board and Nirvani Akhara write to the Supreme Court for a negotiated settlement to the Ayodhya dispute
oppn parties
RBI Keeps Repo Unchanged, Fears Inflation Ahead

By Sunil Garodia

About the Author

Sunil Garodia Editor-in-Chief of indiacommentary.com. Current Affairs analyst and political commentator. Writes for a number of publications.
The RBI acted as per the expectations of the analysts and the stock exchanges in deciding the first bimonthly monetary policy for financial year 2017-18. It wisely maintained the status quo, keeping the repurchase (repo) rate unchanged at 6.25% and the cash reserve ratio (CRR) at 4%. However, it raised the reverse repo rate to 6 percent (an increase of 25 basis points) and the marginal standing facility (for emergency borrowings of banks in case of temporary liquidity crunch) to 6.75 percent from 6.5%.

After demonetization and the subsequent flood of deposits in customer accounts, banks are awash with funds. The RBI had tightened the CRR by imposing a 100% incremental CRR in November 2016 to flush out this excess liquidity that had the potential of flaming inflation. It had subsequently withdrawn the incremental CRR (partly because it realized that in the absence of rapid remonetization and restrictions on withdrawals, the potential of increased inflation by excess liquidity was minimal) in the December 2017 policy. In February 2017 policy, the RBI assumed a neutral stance by again keeping the repo rates unchanged.

The current policy is in tune with the recent RBI policy of keeping liquidity on a tight leash to control inflation. It has constantly averred that the lending rates are low enough but lending is not picking up due to a host of other factors including lack of demand for goods and services. This time, the RBI has also said that if increase in house rent allowance under the seventh CPC is finally approved and awarded, it could lead to inflation. Hence, the apex bank is not amenable to increasing liquidity in the system. It has also said that the combined effect of initial impact of conversion to GST and the met prediction of a weak monsoon may trigger inflationary pressures.

By allowing commercial banks to invest in real estate investment trusts (REITs), the RBI has given a huge boost to that segment of the real estate sector that deals in commercial properties. It has also allowed banks to open up a lucrative new avenue of earning. The move will also benefit real estate companies like DLF who mostly deal in developing properties for commercial uses. It will also lead to a jump in creation of infrastructure like warehouses, industrial parks and office complexes for commercial activities.

The RBI has issued a strong warning to governments writing off farm loans, as done by the UP government recently. RBI governor Urijit Patel said that it “can discourage an honest credit culture and crowd out private borrowers. It is time to eschew loan waiver culture.” The NDA government, of which the BJP is the major constituent, is rightly pursuing the path of fiscal consolidation in budget making at the centre. But if it allows state governments run by the BJP to indulge in blowing away public money at the scale done in UP, the budgetary fiscal consolidation will not amount to much. Additionally, it will have a disastrous effect on the balance sheets of already stressed PSU banks.