Inflation concern led RBI to keep rates unchanged: Bankers

Concern over inflation weighed heavily on RBI when it decided to maintain status quo on policy rates today, bankers said.

Prospects for further cuts in key policy rates in the near future have receded after the apex bank shifted the stance of the monetary policy from 'accommodative' to 'neutral', they said.

The six-member Monetary Policy Committee (MPC) unanimously decided to keep the repo rate unchanged for the second time in a row. The repo rate will continue to stay at the six year-low of 6.25 per cent.

"Concern over inflation was the key driver behind the RBI's decision to press the 'pause' for a rate cut in this bi- monthly policy statement," said Indian Banks' Association Chairman and Central Bank of India CMD Rajeev Rishi in a statement.

"Shift from the 'accommodative' to 'neutral' stance and the announcement of inflation range for the first half and second half within the overall corridor of 4+/-2 per cent indicate a concern on the price level in near future," he said.

According to Rishi, assurance of effective liquidity management and the need for quicker resolution of stressed assets, recapitalisation of public sector banks and linking the interest rates on small savings schemes to changes in yields on G-sec of corresponding maturity etc, goes well with the needs of the banking sector.

A section of bankers does not see any rate cut in policy rates in near future.

"Since RBI has changed its stance from `accommodative' to `neutral', the prospects of further cuts in policy rate in near future have receded," Bank of India Managing Director and Chief Executive Melwyn Rego said.

According to Rego, the primary objective of inflation targeting has played a major role here as the move seems to be wary of hardening global commodity prices, strengthening USD and stickiness in domestic core inflation.

The statement remains committed to maintaining headline inflation closer to 4 per cent in a calibrated manner, as RBI remains watchful of transient impact of demonetisation on price levels and output gap, he said.

ICICI Bank MD and CEO Chanda Kochhar said the decision to keep the policy rate unchanged and shift in stance from accommodative to neutral is based on a judicious assessment of risks going forward.

The monetary policy committee has highlighted concerns around the global policy environment, impact of rising global commodity prices and domestic inflation.

Kochhar said the focus on the medium term inflation target of 4 per cent and the emphasis laid on a durable inflation trend will be growth-supportive.

The policy reflects the need to balance inflation and growth dynamics that will provide long-term stability, Kochhar added.

SBI Chairperson Arundhati Bhattarcharya said the RBI's monetary policy shifting to neutral was on the expected lines.

"Given the general environment of uncertainty both domestically and abroad, the RBI decision to maintain status quo was on expected lines," she said

"RBI view is right that monetary policy transmission will improve further if NPAs are resolved, capital position of banks improves and small savings rates are more market driven."

However, Yes Bank MD and CEO, Rana Kapoor said this stance will allow RBI to ease rates further going forward.

"The shift in stance to neutral from accommodative with a status quo on policy rates should allow RBI, going forward, the flexibility to ease rates to push for stronger growth, amidst Government's fiscal rectitude," he said.

Bankers said in the wake of improved liquidity due to demonetisation, the focus is to restore the short-term disruptions caused by the note ban measure.

"In the light of improved system liquidity, the focus is set to restore the short term disruptions due to demonetisation, rather than lowering the rates," Dena Bank CMD Ashwani Kumar said. "RBI has also kept in view, the effective transmission of rates by banks through MCLR which has eased as an after effect of demonetisation."

"The RBI has rightly indicated that it would watch growth trends, the fiscal approach that is articulated in the Budget, factors impacting inflation while also making room for inclusive growth policies in the coming months," he added.

Bank of Maharashtra MD and CEO RP Marathe said the pressures of global uncertainties, rising oil prices and the demonetisation impact, which is still being discerned by the economy, have played on RBI decision.

The future course on MCLR will be purely governed by trends in underlying parameters like the marginal cost of funds, negative carry and cost of operations, he added.

"RBI's monetary policy shift to neutral from being accommodative is probably premised on a call that headline inflation has bottomed out, core inflation is very steady and trends in the global economy are likely to keep central bankers in the emerging markets on a watch mode," IDFC Bank Chief Economist Indranil Pan said.

According to Pan, the policy also makes it clear that the next target for the RBI would be to attain the 4 per cent handle on a more durable basis.

Read in association with its inflation expectation, Pan said this implies that the RBI is likely to have entered into a longish pause. "Our own inflation projections show a more muted trend than RBI's in the first six months of the current fiscal, but goes up to average at 4.9 per cent in the corresponding period next year."