First Bi-monthly Monetary Policy Statement for the year 2016-17

 The Reserve Bank of India (RBI) has released its first bi- monthly statement for the year 2016-17.
Main highlights:
The central bank cut the repo rate by 25 bps to 6.5 per cent.
CRR(Cash reserve ratio) is maintained at 4 per cent.
The central bank reduced the marginal standing facility (MSF) rate by 75 basis points to 7 per cent.
The minimum daily maintenance of CRR has been cut to 90% from 95%.
Reverse repo rate has been increased to 6% from 5.75%.
GDP growth is projected to improve gradually to 7.6% in 2016-17.
Retail inflation is projected to moderate in 2016-17 to around 5%.
The bank rate stands at 7%.
SLR(statutory liquidity ratio) is maintained at 21.25%.
In its attempt to clean up banks’ balance sheets by March 2017, RBI has asked banks to make additional provisions for corporate loans to sustain potential loan defaults.
Analysis:

• This step of RBI leads to cheaper loans and EMIs along with less rate of interest on deposits.
• From April 1, banks starts following “Marginal Cost of Funds-based Lending Rate” mechanism, which is directly linked with the marginal cost of funds instead of average cost. This means now bank will be allowed to charge less on loans (click here to understand more : http://abhimanuias.com/CurrentAffairsList22_design_details_new.aspx )
• RBI’s aim is to help give a monetary fillip to private investment, which is currently on the lower side because of low capacity utilisation.
• Banks will also stoke consumption because of their bias for consumer loans over investments because of higher delinquencies in the latter. That should help improve capacity utilization rates and pave the path for new investments.
• The direct impact of the 7th pay commission recommendations on headline inflation is expected to be around 150 basis points. The indirect effects are estimated to be around 40 basis points”. The baseline projection of inflation for the fourth quarter of 2016-17 is 5.1%. Therefore, further policy rate cuts aren’t likely to happen easily. But then, if lending rates do indeed fall sharply as monetary transmission improves, there’s little need for more policy rate cuts

By: Vishal