RBI maintains key rates, as concerns over inflation, 'fiscal slippage' rise

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Overall, the transmission of policy rate cuts of 200 bps or basis points (2 percentage points) since January 2015 has led the median base rate of banks to decline by only 75 bps, while MCLR rates have been reduced to 110 bps. Consumer price index (CPI)-based inflation has started to rise (it jumped to 3.4 percent in August from 2.36 percent in July), fuelled by higher food prices, erratic rainfall which has impacted crop output.

The neutral stance was attributed to a possible rise in inflation from its current level to 4.2-4.6% in the second half of FY18. "Of the 12 banks whose spreads widened, six banks took up to six months to pass on the benefit of lower MCLRs to their lending rates; the remaining six banks passed on the benefit of their lower MCLRs, but only partially even after six months". The next meeting of the MPC is scheduled on December 5 and 6, 2017.

Amid weakening investment, GST implementation woes, geo-political tensions and slowing manufacturing sector, the economic growth projection has been revised down from the previous 7.3 % in August to 6.7%. GVA growth in agriculture and allied activities slackened quarter-on-quarter in the usual first quarter moderation, partly reflecting deceleration in the growth of livestock products, forestry and fisheries.

A mechanism has been proposed by RBI for improving the pricing outcome for the "retail user" under which client pricing is directly determined in the market by providing customers with access to an inter-bank electronic trading platform where bid/offers from clients and Authorised Dealer banks can be matched anonymously and automatically. Also, there are some price revisions pending the implementation of GST taking place, the RBI said.

If resurgent price pressures limit the RBI's room to ease, the government could be forced to boost spending, imperiling its budget deficit target and risking the wrath of rating companies that downgraded China last month. GDP hit a 3-year-low forcing the government to consider a stimulus package. Certainly, the MPC will not be happy looking at these trends and think of a rate cut now. But the macro environment has become challenging.

A resolution to a maritime dispute with Ivory Coast has allowed drilling to resume in an offshore oil field, supporting economic growth and thus reducing the prospects of more rate cuts. If crude prices were to see a major spike and gold imports showed strong growth this festive season, the CAD situation may quickly slip out of control. "The timing of this rate cut will of course depend on various factors including inflation trajectory while the dollar movement and the U.S. Federal Reserve actions will also be critical".

Unfortunately the weaker Rupee could further exacerbate rising inflation problems via imported inflation, which is when the price of imported goods rises due to a weak currency's lack of purchasing power.

Brent crude prices reached a two-year high of $57 a barrel on September 26. The fourth bi-monthly monetary policy statement for 2017 -18, to be released on Wednesday, is being keenly awaited by all stakeholders - especially the industry which has been demanding for lower interest rates.