<p>At its meeting last week, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) took a cautious and calculated risk by keeping the policy rate unchanged at 6.5 per cent. It also decided to continue with the withdrawal of accommodation to ensure that “inflation progressively aligns with the target”. The challenge of inflation is greater now than when the committee met last time. In June, the RBI had projected a 5.2 per cent rise in the second quarter but it has revised it upwards to 6.2 per cent, as prices of vegetables have soared in July and August with tomato prices leading the way. </p>.<p>The RBI believes that vegetable prices may come down soon, but there is some uncertainty about the direction of food prices because the monsoon situation and the impact of El Nino are still not clear. The central bank has in any case revised upwards its full year inflation forecast to 5.4 per cent from the earlier 5.1 per cent.</p>.RBI’s pause could increase risk of importing inflation.<p>The RBI has also taken steps to absorb the surplus liquidity generated by the return of the Rs 2,000 notes to the banking system by imposing an incremental cash reserve ratio of 10 per cent. One comforting factor was the lower rate of increase of core inflation against the rising food inflation, but there is the risk of the consolation disappearing in the medium term. That is why Governor Shakti Kanta Das’s statement was hawkish even as the MPC retained the policy stance. He also made it clear that the central bank was ready to align inflation with its objectives and was ready to act any time. Though, as he said, “supply side interventions can limit the severity and duration of such shocks,” there are also factors like the rising crude prices to take into account.</p>.Sceptics turn supporters as RBI proven right on inflation.<p>While there is some uncertainty and caution on the inflation front, the RBI remains optimistic on growth. It expects the growth momentum to continue and has retained its projection for this year at 6.5 per cent, even as there is weakness in external demand and the cumulative rate hikes of 250 basis points are still working their way through the system. Apart from the monetary policy decision, one welcome proposal made by the regulator was to create a framework on floating rates which will safeguard the interests of consumers, especially home loan borrowers, by ensuring greater transparency in the way tenures and monthly instalments are changed. It has proposed to restrict the “unreasonable elongation” of the tenure of floating rate loans and resetting of the tenor by banks. This will be in the interest of borrowers as lenders will be required to inform borrowers when there is such a change and seek their consent. </p>
<p>At its meeting last week, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) took a cautious and calculated risk by keeping the policy rate unchanged at 6.5 per cent. It also decided to continue with the withdrawal of accommodation to ensure that “inflation progressively aligns with the target”. The challenge of inflation is greater now than when the committee met last time. In June, the RBI had projected a 5.2 per cent rise in the second quarter but it has revised it upwards to 6.2 per cent, as prices of vegetables have soared in July and August with tomato prices leading the way. </p>.<p>The RBI believes that vegetable prices may come down soon, but there is some uncertainty about the direction of food prices because the monsoon situation and the impact of El Nino are still not clear. The central bank has in any case revised upwards its full year inflation forecast to 5.4 per cent from the earlier 5.1 per cent.</p>.RBI’s pause could increase risk of importing inflation.<p>The RBI has also taken steps to absorb the surplus liquidity generated by the return of the Rs 2,000 notes to the banking system by imposing an incremental cash reserve ratio of 10 per cent. One comforting factor was the lower rate of increase of core inflation against the rising food inflation, but there is the risk of the consolation disappearing in the medium term. That is why Governor Shakti Kanta Das’s statement was hawkish even as the MPC retained the policy stance. He also made it clear that the central bank was ready to align inflation with its objectives and was ready to act any time. Though, as he said, “supply side interventions can limit the severity and duration of such shocks,” there are also factors like the rising crude prices to take into account.</p>.Sceptics turn supporters as RBI proven right on inflation.<p>While there is some uncertainty and caution on the inflation front, the RBI remains optimistic on growth. It expects the growth momentum to continue and has retained its projection for this year at 6.5 per cent, even as there is weakness in external demand and the cumulative rate hikes of 250 basis points are still working their way through the system. Apart from the monetary policy decision, one welcome proposal made by the regulator was to create a framework on floating rates which will safeguard the interests of consumers, especially home loan borrowers, by ensuring greater transparency in the way tenures and monthly instalments are changed. It has proposed to restrict the “unreasonable elongation” of the tenure of floating rate loans and resetting of the tenor by banks. This will be in the interest of borrowers as lenders will be required to inform borrowers when there is such a change and seek their consent. </p>