The Reserve Bank of India decided to stand pat on interest rates at its monetary policy meeting today. Updates here.
12.00 pm: Based on the RBI's policy decision, statement and conference, economists say the room for a further rate cut has dwindled somewhat though one more rate cut in August will not be surprising.
Having said that, there may be more lending cuts in the offing as the RBI's transmission policy takes effect and a balance sheet clean-up incentivises banks to lend more. Steps on liquidity will also serve as a rate action.
With that, we bring this live blog to a close.
11.59 am: With the policy done and dusted, and no shockers coming through, the market has gained some weight since.
11.57 am: Those are the key takeaways then: no rate cut decision, inflation upside risk seen, monetary stance still accommodative.
Beyond that, the RBI continues to focus on transmission and will review its MCLR regime. RBI's asset quality review not done yet. Some forex volatility may be seen in September. No word on the monetary policy committee announcement, and of course, whether Rajan will be around for a second term.
11.54 am: Jayesh Mehta of BoA-ML says the liquidity situation is expected to remain somewhat tight for the next few months, despite the RBI's intention to improve it.
The 10-year g-sec should not expect too much upside in prices, given that the bond yield has found it difficult to break below 7.4 percent, he adds.
11.51 am: The upside risk to inflation highlighted in the policy is somewhat surprising, says Sonal Varma of Nomura, as the rollout of the Seventh Pay Commission was already known ("must be the rise in crude prices").
"Going forward, it is going to be all about transmission."
11.48 am: The Governor talks about payments banks, where three licencees have already pulled out, leading to concerns whether the business model is viable. He says applicants should have carried out due diligence before applying but adds that he is not unperturbed to see some wanting to quit.
"In fact, it shows that we were adequately liberal in handing out licences."
11.46 am: If Brexit does take place, there could be turmoil in financial markets. "We have three defences -- good policy, longer-term liabilities and sound reserves -- that would help us. But we will be watching the situation as it unfolds," says Rajan.
11.41 am: Rajan talks about lending rate cuts, says that while the MCLR has been rolled out and will be reviewed, banks should cut rates as they get back to health and competition kicks in.
11.37 am: Deputy Governor SS Mundra talks about the RBI's punishing asset quality review (AQR) regime, which has forced banks to recognize and provide for stressed loans worth thousands of crores. He says banks will have to further increase their provisioning coverage ratios (PCR) going forward, does not say whether the worst is behind for banks.
11.33 am: Rajan is asked about loan coverage ratio norms, says that over time the RBI will look to either reduce SLR or LCR for banks.
11.28 am: The rupee is down 7 paise versus the US dollar to 66.8823.
11.24 am: Rajan's statement on the FCNRB outflow issue seems to have unnerved some participants at the press conference, especially when he said some counter-parties with which the central bank had entered into forward contracts back in 2013 may not be able to deliver dollars on time.
In school-teacher fashion, the governor takes reporters through the process, re-iterating that the RBI is well prepared for all outcomes.
11.22 am: “As far as the question of my continuing in this position after September 4 goes, it would be cruel of me to spoil all the fun the press is having with all its conjectures.
I am personally intrigued by all the letters I am supposed to have written. Seriously, in all such cases, the decision is reached after discussion between the government and the incumbent. I am sure you will learn when there is news.
I cannot do better than point you to the statements by the Finance Minister and the Prime Minister. That is all I have to say.”
Sum and substance, Rajan's "statement" refuses to wade into the contentious issue.
11.19 am: CNBC-TV18's Latha Venkatesh addresses the elephant in the room. Will he be around later this year? "I have prepared a statement in this regard," the usually-extempore Rajan says -- to much laughter -- before putting on his reading glasses and reading from a paper.
11.17 am: On the RBI's MCLR mechanism, Rajan says transmission remains a work in progress but it will take a while before we can assess how well it is working.
11.15 am: "Relative to our April stance, data on inflation has surprised on the upside. We have to watch it going forward, given how monsoon plays out and its effects on food prices," says Rajan. "The 5 percent target of March 2017 stays."
11.14 am: The RBI is on track to bring the financial situation from liquidity-deficit to liquidity-neutral but does not spell out a timeline.
11.12 am: Rajan says there may be some rupee-dollar volatility around the time of FCNRB outflows but says the RBI is well prepared.
11.10 am: After reiterating the RBI's monetary policy stance, Rajan talks about the FCNRB deposits, saying he expects outflows of about USD 20 billion and adds that the RBI has covered these in the forward markets.
11.09 am: RBI Governor Raghuram Rajan is about to speak at the post policy conference. For the second last time?
11.07 am: The RBI's decision to move to liquidity neutral situation itself serves as a rate cut, says Jayesh Mehta, India MD and Treasurer, Bank of America-Merrill Lynch. Still, he expects one more rate cut to follow through in 25 basis points.
11.06 am: "The government’s reform measures on small savings rates combined with the Reserve Bank’s refinements in the liquidity management framework should help the transmission of past policy rate reductions into lending rates of banks," the RBI says. "The Reserve Bank will shortly review the implementation of the Marginal Cost Lending Rate framework by banks."
11.05 am: "In its bi-monthly monetary policy statement of April 2016, the Reserve Bank stated that it would watch macroeconomic and financial developments in the months ahead with a view to responding as space opens up. Incoming data since then show a sharper-than-anticipated upsurge in inflationary pressures emanating from a number of food items (beyond seasonal effects), as well as a reversal in commodity prices," the RBI said in its policy statement.
"A strong monsoon, continued astute food management, as well as steady expansion in supply capacity, especially in services, could help offset these upward pressures. Given the uncertainties, the Reserve Bank will stay on hold, but the stance of monetary policy remains accommodative. The Reserve Bank will monitor macroeconomic and financial developments for any further scope for policy action."
11.04 am: The market has given back some gains. The bond yield has risen a bit.
11.02 am: The commentary, however, has turned somewhat hawkish with the Reserve Bank seeing upside risks to its March 2017 inflation forecast of 5 percent.
11.00 am: As expected, the RBI has kept the key rates and ratios -- repo and reverse repo rates, cash reserve ratio and statutory liquidity ratuo -- unchanged.
10.58 am: And oh, this will likely by the last monetary policy decision that will be decided by the Reserve Bank governor. From the next meeting onwards, a six-member Monetary Policy Committee -- another of Rajan's ideas -- will likely helm interest rate decisions.
10.56 am: The governor may also comment on the subject of the FCNR deposits that may be due for maturity in September this year. The FCNR was a three-year window opened up by Rajan to help shore up forex reserves in September 2013 when the rupee was in freefall when he took over.
It allowed NRIs to deposit funds in India at high rates and attracted inflows of USD 34 billion. The RBI has previously said it is prepared to witness a small outflow from that instrument later this year.
10.52 am: At the press conference following the policy meet, the governor is sure to be asked about the subject of his tenure. How he takes the question -- perhaps skirt around it -- will be watched.
10.49 am: Here's trivia: on the issue of whether the cental bank governor should get an extension, each of the past four governors (D Subbarao, YV Reddy, Bimal Jalan and C Rangarajan) got one.
But Rajan's tenure, stellar as it has been, has been marked by a minority view that he has erred on the side of inflation a bit too much. Then there is also the issue of his outspoken nature, where has been seen commenting on subjects considered beyond the RBI governor's remit.
10.45 am: The Reserve Bank has cut rates by a total of 150 basis points (1.5 percent) since the start of its easing cycle in January last year, from a peak 8 percent to 6.5 percent now.
While bond yields have fallen commensurately, from about 8.9 percent to 7.4 percent, lending rates have fallen by only 75 basis points, despite several steps the RBI has taken to improve transmission.
10.41 am: The market is holding on to gains of about 0.4 percent this morning ahead of the policy decision. (Nifty Bank is up 0.7 percent.) No rate cut will likely be taken in stride but a suprise cut may send stocks soaring.
10.38 am: The Reserve Bank is expected to cut rates only in its August 9 policy review meet, as normal rains are expected to contain agricultural inflation and help in the uptick of rural demand conditions, says a report by Bank of America-Merrill Lynch.
10.36 am: Then there is the small matter of the RBI's liquidity policy, which underwent a drastic change during the last policy decision where the central bank decided to move the Indian financial system from a perennial liquidity-negative situation to liquidity-neutral.
Any commentary on liquidity would offer market participants more insight into the governor's stand on the subject.
Read what CNBC-TV18 executive editor Latha Venkatesh has to say on the liquidity policy here.
10.34 am: However, the meeting assumes importance in light of the political hullabaloo that has brewed over whether Rajan will be given a second term. His first term ends in September.
10.32 am: Expectations by way of a rate decision are next to none this morning, as almost all economists expect the RBI to hold fire. This will be thanks to CPI inflation being above the central bank's target (5.39 percent in April) and expected to strengthen further. Further, Rajan would like to stand pat till he has a better view on how monsoon is panning out. Crude prices too have been rising of late.
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First Published on Jun 7, 2016 10:34 am