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RBI’s key policy rate can come down by 25-75 bps: Economic Survey

LiveMint logoLiveMint 11-08-2017 PTI

New Delhi: With inflation ruling low, there is scope for reducing Reserve Bank of India (RBI)’s key policy rate by 25-75 basis points, said the Economic Survey-part II.

For the first time Friday, the government came out with second or mid-year economic survey for 2016-17 highlighting newer factors the economy faces since last such exercise.

The survey further said broadly real neutral interest rates hover around 1.25-1.75%, adding “that implies neutral nominal rates—assuming a target inflation of 4%—of 5.25-5.75%.” “Today’s rate is 6% or about 25-75 basis points above neutral rates,” it added.

Noting that during 2016-17, gross bank credit outstanding grew at around 7% on an average, the survey said, “The sluggish growth can be attributed to several factors, including incomplete transmission of the monetary policy as banks had not passed on the entire benefit of monetary easing to borrowers.”

It further pointed out that the twin balance sheet problem—at the end of banks and corporates—more attractive interest rates for borrowers in the bond market and from non-banking financial institutions are other reasons for slow bank credit growth.

The Reserve Bank of India cut the policy rate by 50 basis points during 2016-17. However, it shifted its monetary policy stance from accommodative to neutral in February 2017 and cut the repo rate by 25 basis points in August 2017.

The survey also said sluggish growth and increasing indebtedness in some sectors of the economy have impacted the asset quality of banks, which is a cause for concern. The government amended the Reserve Bank of India Act, 1934, in May 2016 to provide for a revised monetary policy framework.

Under the amended Act, inflation target will be set by the government, in consultation with the RBI, once in every five years, which provides for a statutory basis to an empowered Monetary Policy Committee (MPC). The government has fixed the inflation target of 4% with tolerance level of +/- 2% for the period beginning from 5 August 2016 to 31 March 2021.

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