AA Edit | RBI ‘neutral’ as future uncertain

The Reserve Bank of India-led Monetary Policy Committee (MPC) on Wednesday kept the repo rate — the interest rate at which RBI lends — unchanged for the tenth consecutive time at 6.5 per cent. However, it unanimously decided to change the monetary policy stance to neutral, citing inflation concerns driven by uncertain geopolitical scenarios and stubbornly high food prices.

Previously, the RBI’s monetary policy stance — policy direction in common man’s parlance — was one of ‘withdrawal of accommodation’, which means easy monetary policies are being withdrawn. Accommodation and tightening are two extreme ends of the monetary policy yardstick.

A central bank typically opts for monetary accommodation when it wants to push economic growth of a country through promoting consumption by lowering interest rates. If the central bank views inflation as a bigger concern to it than economic growth, it opts for monetary tightening, which discourages consumption by increasing interest rates.

The current policy direction is neutral — neither accommodative nor tightening — which would suggest that the RBI foresees an uncertain future — mostly because of the escalating crisis in West Asia though both economic growth and inflation are in comfortable zones. In his post-policy statement, the RBI said that it will remain unambiguously focused on a durable alignment of inflation with the target, while supporting growth.

Referring to recent reports on the likelihood of stress buildup in a few unsecured loan segments like loans for consumption purposes, microfinance loans and credit card outstandings, RBI said banks and NBFCs need to carefully assess their individual exposures in these areas, both in terms of size and quality.

In a major initiative aimed at protecting customer interests, the RBI has barred banks and NBFCs from levying foreclosure charges or pre-payment penalties on any floating rate term loan sanctioned to individual borrowers for purposes other than business.