RBI policy statement shows softening of stance: India Inc.

New Delhi/Mumbai, June 7 (IANS) Describing RBI's decision to maintain its key interest rate as being along expected lines, India Inc on Wednesday said the central bank's latest policy statement indicated a softening of its stance and opens up the possibility of a rate cut in the near future.

At its second bi-monthly monetary policy review of the fiscal held in Mumbai on Wednesday, the Reserve Bank of India (RBI) maintained status quo on its repo, or short-term rate for lending to commercial banks, at 6.25 per cent for the fourth successive policy review, dashing the government's hopes of a reduction. In doing so, the policy statement said the MPC was guided by the risks to inflation.

"Despite a sharp reduction in its inflation forecast, the MPC's policy stance has been kept 'neutral' citing inflation risks on which they seek more clarity. Yet, we believe, given the likely undershooting of inflation, the 'neutral' stance has a de-facto softening bias," domestic rating agency Crisil said in a statement.

Meanwhile, reacting to the RBI decision, the government said that macroeconomic indices warrant easing of rates and seldom before have economic conditions warranted a substantial monetary policy easing as they do at this juncture.

Chief Economic Advisor Arvind Subramanian felt that the central bank had overstated the risks on inflation, noting the inflation outlook has been benign, while growth in the economy has decelerated along with slowdown in private investment, credit growth and gross capital formation.

"Seldom have economic conditions and the outlook warranted substantial monetary policy easing," he said.

Private-sector ICICI Bank Chief Executive Chanda Kochhar welcomed the RBI's acknowledgement of downward shift in the inflation trajectory.

"It is also heartening that the RBI has again reiterated its focus on resolution of stressed assets which will help to strengthen the banking system and ensure that investments made are optimally utilised," she said.

"The SLR (statutory liquidity ratio) cut and reduction in risk weights for housing loans are positive moves that will support bank liquidity and encourage growth in housing loans," he added.

Announcing the policy review, RBI Governor Urjit Patel said: "The current state of the economy underscores the need to revive private investment, restore banking sector health and remove infrastructural bottlenecks. Monetary policy can play a more effective role only when these factors are in place."

"Premature action at this stage risks disruptive policy reversals later and the loss of credibility," he added.

"Acknowledgment of recent weak data on growth and inflation by the RBI opens up the possibility of a rate cut in August," said Bloomberg Intelligence's India Economist Abhishek Gupta.

Welcoming the SLR reduction, industry chamber Ficci's President Pankaj Patel said that a lending rates cut was much needed, given that domestic private investments have been persistently weak.

"Also, the GDP numbers released last week clearly reflect the effect of demonetisation panning out in the fourth quarter of last fiscal. At this juncture, the central bank signalling a move towards an accommodating stance would have helped uplift the sentiment," he said.

Suvodeep Rakshit, Senior Economist at Kotak Institutional Equities, said that they "maintained expectation that the RBI will likely remain on a pause as it continues to watch out for the evolving inflationary conditions".

"We believe that a case for a rate cut will be strengthened only with a downside surprise to RBI's inflation estimates for the second half of 2017-18."

R. Sivakumar, Head - Fixed Income, Axis Mutual Fund, said that if inflation continued to remain low, it could result in rate cuts in the months ahead.

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