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RBI's Monetary Policy Oct 2016, The Simplest Summary

On Tuesday Oct 4, 2016, Reserve Bank of India announced its Fourth Bi-monthly Monetary Policy for the Financial Year 2016-17.

Before we go into the details, here's one key development... this is the first ever policy to be presented by a "Monetary Policy Committee". Henceforth, this will be the practice followed.

Till now, it was the RBI Governor who was deciding on the monetary policy. Going forward, a six-member Monetary Policy Committee will frame the policy, on a bi-monthly basis.

(By the way: Earlier also the RBI Governor was supported and guided by a Committee to draft the policy. However, the recommendations of the same were "purely advisory" in nature. The final decision was of the Governor. And, on numerous occasions, he did disagree with the Committee's viewpoint(s) and made his own announcements.)

So what does the RBI's Fourth Bi-monthly Monetary Policy for FY 2016-17 offer?

One. The BIG announcement is the cut in the policy interest rates by 0.25%.

The trend in cutting interest rates began early last year in Jan 2015 and continued till Sept 2015. The total reduction, during this 9-month period, added up to 1.25%. Since then, there has been a long pause for a full one year (except for a small cut of 0.25% in April 2016).

Hence, this recent reduction in the interest rates, is a significant change.

We, however, need to wait and watch:

Because the cut in the interest rates at the policy level, has not fully translated into a cut at the retail level... especially for the borrowers. Banks have been actively cutting the deposits rates, but quite reluctant to bring down the lending rates.

Though the policy interest rates (prior to the latest cut) were slashed drastically by a total of 1.50%, banks have on an average passed on a mere around 0.6-0.7% as reduction in the interest rates on their loans. This, despite the repeated criticism by the RBI that banks are not 'equally' responsive on the lending side. 

So let's keep our fingers crossed, for a more generous transmission of this latest interest rate cut to the "helpless" borrowers.

There's nothing confusing or difficult about the RBI's Monetary Policy Statement!

Two. The above decision, to reduce the interest rates, is in line with the objective of 
(a) achieving CPI (Consumer Price Index) inflation of 5% by last quarter of 2016-17, and 4% with +/- 2% band as the medium-term target and 
(b) supporting economic growth.

Three. Slowness in the global economic growth has been more pronounced in 2016, and the outlook has worsened in the recent months with sharp drop in the world trade volume. Risks exist in many forms such as Brexit, increasing protectionism, stressed banks in Europe, slowdown in China, etc.

Four. International financial markets have, however, stabilised after the shock of the 'unexpected' Brexit announcement; which led to steep stock market corrections, huge volatilities and plunging currencies across the world. Crude and other commodity prices too have firmed up. But the outlook is still uncertain.

Five. Domestically, however, things are in a much better shape. Good monsoon this year will translate into a good growth in the agricultural sector. Industrial sector, despite a recent deceleration, is also likely to witness a good growth due to huge spending on the infrastructure (roads, railways, inland waterways, etc.), 7th Pay Commission pay hikes, increased momentum in steel + cement output and other policy initiatives. Services sector too is expected to maintain its growth trajectory.

Six. India is now sitting on an "all-time high" foreign exchange reserves of around US$ 372 billion. This is despite the slowdown in the exports, reduced pace of the Foreign Direct Investment, decline in remittances and flattening software earnings. The reserves have increased on account of reduction in oil and gold imports, and stronger portfolio inflows (India being one of the few strong world economies that offer good "positive" yield).

Seven. Given the expectations on good agricultural production and the supply-side measures undertaken, food inflation is likely to see a downward momentum. This will cool down the inflation. However, the higher spending consequent to the 7th Pay Commission award, will push up the inflation. On the balance, the CPI inflation is likely to be around the desired target of 5% by Mar 2017.

Eight. The projected Gross Value Added for 2016-17 is maintained at 7.6%. The positive factors include improved agricultural growth, consumption-led industrial growth, comfortable liquidity and RBI's monetary stance to keep the interest rates low. The big negative factor is the sluggish world trade and its impact on the exports.

Nine. Last but not the least, easy liquidity in the economy, together with the reduction in the interest rates on the 'competing' small savings schemes, should encourage banks to be more responsive in transmitting the policy interest rate reductions to their borrowers.

In short, RBI has done its job

Now, the banks have to do theirs... and pass on the maximum possible rate cuts to the struggling borrowers and reduce their EMI burden.

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