oppn parties RBI Keeps Repo Unchanged, Fears Inflation Ahead

News Snippets

  • Amit Shah says the government will identify and deport illegal immigrants from all parts of the country
  • Reports from Pakistan confirm that Hafiz Saeed has been arrested and sent to jail
  • After the SC order, Karnataka Speaker says he will go by the Constitution in deciding on the resignations of the 16 MLAs
  • Rebel MLAs say they will not attend the trust vote on Thursday
  • Supreme Court rules that rebel MLAs cannot be forced to attend the assembly and vote in the floor test
  • Both the Centre and the Assam government have sought re-verification of up to 20% of draft NRC data
  • Pakistan opens its airspace for Indian planes
  • Dilapidated building collapses in Mumbai, killing more than 10 people while many were still trapped
  • Kulbhushan Jadhav case verdict to be delivered today by the ICJ
  • A Vistara flight landed in Lucknow with just 5 to 10 minutes of fuel left in the tank
  • Supreme Court to decide on Karnataka MLAs plea today
  • Karnataka alliance to face floor test on Thursday
  • China says that the next Dalai Lama will be appointed by it
  • Pakistan assures India that no anti-India activity would be allowed in the Kartarpur corridor
  • Pakistan to allow visa-free access to 5000 pilgrims every day to undertake pilgrimage using the Kartarpur corridor
ISRO calls-off Chandrayaan-2 mission launch at last moment due to technical snags. revised date will be announced later
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.