Statsguru: Why MPC changed its stance on rates

Despite the clamour for lower interest rates, the monetary policy committee (MPC) maintained the status quo on rates in its most recent meeting. MPC also signalled a shift in the stance of monetary policy from accommodative to neutral, perhaps indicating the end of the rate cut cycle. The repo rate stands at 6.25 per cent as shown in Chart 1.
 
MPC’s stance appears to be driven by the belief that inflation continues to be a threat. While the headline inflation rate has fallen to 3.4 per cent as seen in Chart 2, core inflation continues to be sticky. The worry is that the spurt in prices of base metals (as seen in  Chart 3) and that of crude oil (as Chart 4 shows) could spark inflation pressures. 

 
Expectations of lower interest rates were centred around the view that economic activity had slumped after demonetisation. The Reserve Bank of India (RBI) itself has lowered its estimate of GDP growth to 6.9 per cent in FY17, from 7.1 per cent earlier. As shown in Chart 5, both the manufacturing and services Purchasing Manager Index (PMI) point to a slowdown in economic activity.
 

Further, with private investments showing no signs of reviving, many believe that loose monetary policy could help kickstart the investment cycle, pushing up growth. Credit growth has fallen to five per cent as shown in Chart 6.

 
But RBI believes that the timely transmission of rate cuts to bank lending requires the issue of non-performing assets (NPAs) — NPAs of 37 listed banks have swelled to 9.2 per cent of advances (as Chart 7 shows) —  to be addressed quickly. This suggests that rate cuts are unlikely to revive growth, implying that the onus of lifting growth lies with the government.