RBI links rate cut to deficit

Mumbai: The real estate sector and home loan borrowers, who were expecting some relief on interest rates, will have to wait till the Union Budget later this month as RBI said it will take a call on rate cut after the budget.

On Tuesday, RBI governor Raghuram Rajan kept the repo rate unchanged at 6.75 per cent and the cash reserve ratio at four per cent respectively. But he said he would await further data from the Budget and the government’s action on the 7th Pay Commission award, that is likely to give a momentum to inflation in the next one or two years.

Dr Rajan said the “structural reforms in  the Union Budget that boost growth while controlling spending, will create more space for monetary policy to support growth while ensuring inflation remains on the projected path of five per cent by the end of 2016-17”.

He threw the ball into the government’s court to also “rekindle growth drivers in order to place the economy on a higher and durable growth trajectory”.

He also reminded the government of the need for fiscal rectitude, low inflation and a modest current account deficit, which made India a beacon of stability amid the global storm.

“These need to be strengthened so that the foundations of growth are stable and sustainable, so the onus for growth is entirely on the government,” Dr Rajan explained.

He was also confident banks would transmit the remaining of the 125 basis point cut in rates made last year.

On the banks having to clean up their balance sheets by March 2016, Dr Rajan said most banks were in favour of this as it would make them stronger to meet further challenges.

Dr Rajan expressed concern over inflation in services, which has been “sticky” since September 2015, across housing, transport and communications, medical care and other sectors like education and health. Housing inflation expectations remain high, and the rate of increase in corporate staff costs picked up. On the other hand, rural wage growth has been muted, he observed.

On inflation, he said the January 2016 target of six per cent should be met because of benign fruit and vegetable prices and crude oil while the target for 2016-17 could be around five per cent due to positive factors like current rates in crude prices and exchange rates.

However, he said the inflationary impact of the 7th Pay Commission had not been factored in. He also projected GDP growth for 2015-16 at 7.4 per cent with a downside bias, and 7.6 per cent for 2016-17 despite headwinds as the government has taken steps to restart stalled projects and introduce some key reforms.

Foreign investment in startups to get easy

In order to address the issue of scarcity of funds faced by startups in India, RBI is planning to relax regulations governing cross border transactions that will make it easier for start-up enterprises to access funds from the overseas market.

In its bi-monthly monetary policy statement issued on Tuesday, RBI said that it would relax the necessary provisions under the Foreign Exchange Management Act that will enable start-up enterprises irrespective of sectors to access foreign venture capital investment without restriction and also allow such enterprises to access rupee loans under the external commercial borrowing framework with relaxations in respect of eligible lenders.

The proposed relaxation would also enable venture capital investors to transfer their shares to other residents or non-residents, issuances of innovative FDI instruments like convertible notes by startup enterprises and streamlining of overseas investment operations for the start-up enterprises.  

“These measures will create an enabling framework for receiving foreign venture capital, differing contractual structures embedded in investment instruments, deferring receipt of considerations for transfer of ownership, facilities for escrow arrangements and simplification of documentation and reporting procedures,” RBI said in its policy statement.