Second Bi-monthly Monetary Policy: 2016-17

On the basis of an assessment of the ‘current and evolving macroeconomic situation’, RBI has retained policy rates in its second bi-monthly monetary policy on 7 June. Thus, the policy repo rate under the liquidity adjustment facility (LAF) is kept at 6.5 per cent; CRR at 4 per cent; reverse repo rate 6.0 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 7.0 per cent.
Obviously despite concerns on inflation — typified in projection retention of 5 per cent CPI inflation but with an upward bias — accommodative stance on monetary policy is retained. There is a sharper-than-anticipated upsurge in inflationary pressures emanating from a number of food items (beyond seasonal effects), since April. RBI pins its hope on a strong monsoon, continued astute food management, and steady expansion in supply capacity, especially in services, which could help offset these upward pressures.
Transmission of policy into bank lending rates remains work in progress. RBI will shortly review the operation of the Marginal Cost Lending Rate framework to iron out any issues. Timely capital infusions into constrained public sector banks will also aid credit flow.
On bank balance sheet clean–up (of stressed loans), there is intensive discussion of various issues, but there is no intent to go back to the days of forbearance or reverse the move towards transparent bank balance sheets.
There are signs that corporate performance is improving. The recent uptick in commodity prices is providing some relief to commodity exporters. Steel prices have firmed appreciably. Some high frequency indicators for April, point to a firming recovery, although it is still uneven. Leading the upturn are cargo traffic at major ports, automobile sales (especially two-wheelers and three-wheelers), commercial vehicle sales, passenger air and freight traffic, cement production and steel consumption.
On a reassessment of balance of risks, therefore, the GVA growth projection for 2016-17 has been retained at 7.6 per cent with risks evenly balanced.


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