An emphatic continuity: Saugata Bhattacharya

As expected, the Reserve Bank of India (RBI) review kept policy rates on hold, but the language and action emphasised continuity. The policy maintained its accommodative stance and assured of a steady supply of durable liquidity, following up on the changed framework earlier announced in April.

To underline this stance, it announced a further tranche of open market operations (OMOs) purchase of securities, even though market liquidity conditions are close to neutral. It also maintained its 5 per cent inflation forecast for March 2017, despite acknowledging a number of upside risks to inflation.

This policy review was important not just in terms of signalling the future stance on easing, but also in terms of a significant milestone as possibly the last one to be crafted by an individual, albeit based on multiple inputs based on advisory committees, as well as internal inputs from RBI colleagues.

Policy will shift to a collective decision making process by a six-member Monetary Policy Committee, with six individual votes. The endorsement of the 4-per cent centred inflation target by the government also signals the importance attached to "monetary stability".

The key announcement in this policy was the reiteration of sufficient supply of durable liquidity to keep system liquidity at neutral levels, which the system, with RBI support, has rapidly achieved in the first quarter of 2016-17 itself. This has helped lower overall system interest rates, and are likely to help banks in progressively reducing rates in the coming months. In addition, RBI has also assured a judicious supply of liquidity to prevent any undue volatility during the months when the FCNR deposits are due for redemption.

The turnaround in India’s fortunes over the past three years, largely overlapping Governor Raghuram Rajan's tenure, has been remarkable. Yet, the government's support for RBI's monetary policy through fiscal discipline, moderate food support price hikes and other policy reforms should be emphatically highlighted. A good monsoon after two years of truancy is expected to reinvigorate demand and moderate food prices. Global conditions, while uncertain, are still stacked on India's side; oil prices are likely to remain moderate. India looks set to build upon and accelerate RBI and government reform initiatives.

Saugata Bhattacharya Senior VP and Chief Economist, Axis Bank