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RBI Monetary Policy 2019 Updates: Forensic audit on PMC Bank scam expected by month-end, says Shaktikanta Das

FP Staff

The Reserve Bank of India (RBI) governor Shaktikanta Das on Thursday said the forensic audit report on the scam-hit PMC Bank is expected by the month-end, and efforts are also on to assess the realisable value of assets held by the cooperative that can be monetised. The RBI has also given its suggestions on changes in regulations that are required for regulating the cooperative bank sector better.

It can be noted that the RBI had on 23 September placed the city-headquartered bank under an administrator and capped the cash withdrawals, leading to public outrage. The curbs have since been lifted in multiple changes.

"There is a forensic audit underway. We will get the report by the end of this month. Assessment of the realisable value of the assets of the bank is also on," Das told reporters after the announcement of the monetary policy.

He said professional valuers are helping in valuation of PMC assets. Separately, there is a coordination mechanism in place consisting of the RBI-appointed administrator and the law enforcement authorities such as the Economic Offences Wing (EOW) of the city police, the Enforcement Directorate (ED) and RBI officials for asset valuation, he added.

"Once we get the forensic auditor report and get a final numbers on the realisable value, then a call will be taken on the further course of action," Das said.

The RBI raised its inflation projection to 5.1-4.7 percent for the second half of the current fiscal on the back of spike in prices of vegetables such as onion and tomatoes.

The central bank had earlier estimated headline inflation at 3.5-3.7 percent for the second half of the ongoing fiscal.

"Going forward, the inflation outlook is likely to be influenced by several factors. First, the upsurge in prices of vegetables is likely to continue in immediate months; however, a pick-up in arrivals from the late kharif season along with measures taken by the government to augment supply through imports should help soften vegetables prices by early February 2020," the RBI said in its fifth bi-monthly monetary policy review of the fiscal.

There are incipient price pressures seen in other food items such as milk, pulses, and sugar likely to be sustained, with implications for the trajectory of food inflation, it said.

Retail inflation increased sharply to 4.6 percent in October, propelled by a surge in food prices.

Talking about drivers of the Consumer Price Index (CPI), it said, food inflation spiked to 6.9 percent in October €" a 39-month high €" pushed up by a sharp increase in prices of vegetables due to heavy unseasonal rains.

Prices of onions, in particular, shot up by 45.3 percent in September and further by 19.6 percent in October, it said.

Inflation in several other food items such as fruits, milk, pulses and cereals also increased, reflecting diverse factors €" the cost push of fodder prices in the case of milk; decline in production and sowing area of pulses; and minimum support price effects. Sugar and confectionery prices moved out of deflation in October as sugarcane output shrank on an annual basis, it said.

However, it said domestic demand has slowed down, which is being reflected in the softening of inflation excluding food and fuel. Crude oil prices are expected to remain range bound, barring any supply disruptions due to geo-political tensions.

"Taking into consideration these factors, the CPI inflation projection is revised upwards to 5.1-4.7 percent for H2 of 2019-20 and 4.0-3.8 percent for H1 of 2020-21, with risks broadly balanced," it said.

It is, therefore, prudent to carefully monitor incoming data to gain clarity on the inflation outlook.

The RBI sharply lowered the growth forecast for the current financial year to 5 percent from the earlier estimate of 6.1 percent on account weak domestic and external demand.

India's economic growth according to government data has slipped to over six-year low of 4.5 percent in the second quarter of the current fiscal mainly due to contraction in manufacturing sector output.

"Real GDP growth for 2019-20 is revised downwards from 6.1 percent in the October policy to 5.0 percent, 4.9-5.5 percent in H2 (this fiscal) and 5.9-6.3 percent for H1(2020-21)," RBI said in its fifth bi-monthly monetary policy review.

While improved monetary transmission and a quick resolution of global trade tensions are possible upsides to growth projections, a delay in revival of domestic demand, a further slowdown in global economic activity and geo-political tensions are downside risks, it said.

On the positive side, however, it said, monetary policy easing since February 2019, and the measures initiated by the government over the last few months are expected to revive sentiment and spur domestic demand.

The rate setting Monetary Policy Committee noted that economic activity has weakened further and the output gap remains negative.

However, several measures already initiated by the Government and the monetary easing undertaken by the Reserve Bank since February 2019, are gradually expected to further feed into the real economy, it said.

"Data on corporate finance and on projects sanctioned by banks and financial institutions suggest some early signs of recovery in investment activity, though its sustainability needs to be watched closely. The need at this juncture is to address impediments, which are holding back investments," it said.

Equity benchmark BSE Sensex dropped over 100 points in the afternoon session on Thursday, after the Reserve Bank of India kept the key policy rate unchanged at 5.15 percent and decided to continue with its accommodative stance to support the economy.

After opening higher by 84.17 points at 40,934.46 in opening deals, the 30-share index pared all gains to turn negative after the policy announcement by the Reserve Bank of India (RBI).

It was trading 100.56 points, lower at 40,749.73 at 1149 hours. Similar movement was seen on the NSE and the broader NSE Nifty was trading 11.25 points, or 0.09 percent, down at 12,031.95 at 1212 hrs.

Top losers in the Sensex pack included Sun Pharma, Yes Bank, Bharti Airtel, Tata Steel, Tata Motors, IndusInd Bank shedding up to 2 percent.

RBI Governor Shaktikanta Das-headed Monetary Policy Committee (MPC) has kept the repo rate unchanged at 5.15 percent.

The MPC also decided to continue with the accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target.

The central bank also revised GDP growth downwards to 5 percent for 2019-20 from 6.1 percent projected in its October policy.

"The Monetary Policy Committee recognises that there is monetary policy space for future action. However, given the evolving growth-inflation dynamics, the MPC felt it appropriate to take a pause at this juncture," the RBI said in its fifth bi-monthly monetary policy for this fiscal.

The panel decided to continue with the accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target.

All the six members of the MPC voted in favour of a rate pause.

The CPI inflation projection is revised upwards to 5.1-4.7 per cent for H2 FY20 and 4-3.8 per cent for H1 FY21.

If the Reserve Bank of India (RBI) cuts the repo rate today, it would be the sixth reduction in the short-term lending rate this financial year.

Experts are of the view that the RBI may cut interest rates for the sixth straight time today to support growth that has continued to slip to more than six-year low due to slump in manufacturing.

RBI has cut interest rates on every single occasion the multi-member MPC has met since Shaktikanta Das took over as the Governor of RBI in last December.

In five reductions so far in 2019, interest rates have been lowered by a total of 135 basis points over concerns that growth momentum is slowing down and also to try to boost liquidity in the financial system.

The Gross Domestic Product (GDP) growth slowed sharply to 4.5 percent in the July-September quarter, hit by a slump in manufacturing output, which contracted by 1.0 percent. The pace of GDP growth has moderated from the 5 percent rate in April-June and 7 percent in July-September quarter of 2018.

Das had previously stated that interest rates will reduce until growth revives and this gives confidence that interest rates may be reduced at the end of three-day monetary policy review beginning December 3, a banker, wishing not to be identified, said.

"With the RBI Monetary Policy Committee having decided to retain an accommodative stance following its October rate cut, further rate cuts are possible if economic conditions remain weak," said Rajiv Biswas, Asia Pacific Chief Economist at IHS Markit.

The fall in GDP growth rate was despite a slew of new fiscal policy measures including a large reduction in the base corporate tax rate in a bid to boost private sector investment.

Rumki Majumdar, Economist, Deloitte India said inflation is low and is expected to remain so because of the excess capacity in the economy. "This gives the RBI the elbow room to cut rates, which is highly anticipated in the upcoming December meeting."

In doing so, RBI may look past the recent uptick in inflation last month, largely attributed to vegetables such as onions. But importantly, there has been a slide in core inflation.

Motilal Oswal Financial Services Ltd chief economist Nikhil Gupta said: "We are afraid that expectations of better growth in 3QFY20 (October-December) may not pan out. Leading indicators suggest that October (festival month) was the worst in the current cycle. We believe that growth could weaken further to around 4 per cent in 3QFY20, which will mark the trough."

"Our full-year growth forecast, thus, is revised down from 5.7 per cent earlier to 4.5 per cent for FY20," he said.

Ranen Banerjee, Leader Public Finance and Economics, PwC India, said the second quarter GDP numbers made it more imperative for a fiscal led priming as the monetary policy interventions clearly are not transmitting.

"Thus, just to depend on another rate cut by RBI in the upcoming MPC meeting may not be sufficient. The situation demands a coordinated fiscal priming on areas with higher multipliers and where spends could be immediate combined with a monetary policy push to address the effective transmission of rate cuts to the NBFCs. Effect of rural demand uptick on Q3 numbers will be crucial to avert a sub 5 per cent annual growth rate," Banerjee said.

Sreejith Balasubramanian, Economist - Fund Management, IDFC AMC said bottoming-out of growth could be further down the road and recovery is unlikely to be V-shaped as consumer demand, credit supply and risk appetite remain lacklustre.

"This and the falling core-CPI should allow the RBI focus more on growth, while a major fiscal stimulus is hindered by the lack of available household financial savings," he said.

Rajni Thakur, Economist, RBL Bank said the growth in the second half of the year could remain evasive unless government pumps in more stimulus and continues to heavy lift growth push through the fiscal year.

"The grind up is going to be slow and heavily dependent on fiscal support to come out of current growth recession."

Majumdar said aggressive asset sales and privatisation reforms will give the government some fiscal space to incur counter-cyclical fiscal policies to boost growth without widening the fiscal deficit.

"Confronted with the sharp slowdown in economic growth momentum, the Indian government should give a high priority to implementing additional measures to bolster manufacturing output and kick-start an upturn in the investment cycle.

"Accelerated government spending on infrastructure projects such as roads, railways and ports, as well as urban infrastructure such as affordable housing and hospitals, are the type of fiscal policy measures that could help to revive economic growth momentum within a relatively short timeframe," Biswas said.

While the RBI has been helping through its monetary policy easing measures, the impact is likely to be more protracted, since monetary policy stimulus effects on the real economy generally act with long lags, he said.

€" With inputs from agencies

Also See: RBI monetary policy: Shaktikanta Das says central bank can't keep on slashing policy rates every time

RBI monetary policy: Central bank unexpectedly pauses interest rate on inflation concern, cuts GDP growth forecast

RBI monetary policy: Central bank sharply lowers growth projection to 5% for current fiscal

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