Connect with us

Business

RBI keeps repo rate unchanged at 6%

Reserve Bank of India has kept key policy repo rate unchanged at 6 percent, in a third consecutive pause for the monetary policy.

No surprises for the hawkish tone. The inflation estimates have been revised at 5.1 percent in Q4 due to factors including pick up in food prices and international crude oil prices.

“CPI inflation for 2018-19 is estimated in the range of 5.1-5.6 percent in H1, including diminishing statistical HRA impact of central government employees, and 4.5-4.6 percent in H2, with risks tilted to the upside,” RBI’s monetary policy statement said.

RBI said, “In terms of actual outcomes, headline inflation averaged 4.6 per cent in Q3, driven primarily by an unusual pick-up in food prices in November. Though prices eased in December, the winter seasonal food price moderation was less than usual. Domestic pump prices of petrol and diesel rose sharply in January, reflecting lagged pass-through of the past increases in international crude oil prices, it said.

The 2-day deliberations on February 6 and 7 by the Monetary Policy Committee (MPC) headed by Governor Urjit Patel noted that the inflation outlook is clouded by several uncertainties on the upside. First, the staggered impact of HRA increases by various state governments, pick-up in global growth and the Union Budget proposal to revise MSP (minimum support price).

The government promised to ensure MSP of key crops at 1.5 times the cost of production. This could mean at least a 50-70-basis-points increase in the headline inflation number.

Growth outlook

GVA (gross value added) growth for 2017-18 is projected at 6.6 percent. Beyond the current year, the growth outlook will be influenced by several factors including GST, early revival signs of investment climate reflecting credit offtake and recapitalisation of banks even as resolution of stressed assets is underway.

GVA growth for 2018-19 is projected at 7.2 percent overall – in the range of 7.3-7.4 percent in H1 and 7.1-7.2 percent in H2 – with risks evenly balanced.

Repo rate – the rate at which banks borrow short term funds from RBI – continues to stand at 6.00 percent while the reverse repo is at 5.75 percent.

The liquidity in the system continues to be in surplus mode, but it is moving steadily towards neutrality, the statement added.

The December bi-monthly resolution projected inflation in the range of 4.3-4.7 percent in the second half of 2017-18, including the impact of increase in HRA (house rent allowances).

“Since the MPC’s last meeting in December 2017, global economic activity has gained further pace with growth impulses becoming more synchronised across regions… Financial markets have become volatile in recent days due to uncertainty over the pace of normalisation of the US Fed monetary policy…,” said the sixth bi-monthly Monetary Policy Statement for 2017-18.

Rise in crude oil prices, coupled with a rise in prices of vegetables, has already led the consumer price index (CPI) or retail inflation shoot up from just under 2 percent in June 2017 to a 17-month high of 5.21 percent in December 2017.

As inflation remains a worry, in the last few months, RBI has been gradually nudging up its inflation forecast. While keeping the medium-term target for CPI inflation of 4 percent within a band of +/- 2 percent, the Central Bank had raised the near-term forecast of inflation to 4.3-4.7 percent for the second half of FY18.

Amid rising interest rate scenario, experts had pointed out risks of higher inflation with fiscal slippages and higher food prices apart from the government’s plans to increase the Minimum Support Price (MSP).

The government has said the fiscal deficit in 2017-18 will be 3.5 percent, higher than the budgeted 3.2 percent at the start of this fiscal, which is seen as a negative by the bond and equity markets, and already reflected in higher yields and falling stock prices in the wake of the Budget.

Of the six members, four voted in favour of a pause while one called for a rate hike of 25 bps.

Chetan Ghate, Dr. Pami Dua, Dr. Ravindra H. Dholakia, Dr. Viral V. Acharya and Dr. Urjit R. Patel voted in favour of the monetary policy decision. Dr. Michael Debabrata Patra voted for an increase in the policy rate of 25 basis points.

The minutes of the meetings will be published 14 days from now on February 21.

The last repo rate cut by RBI was done in August 2017 when the central bank had reduced the repo rate by 25 basis points (bps) from 6.25 percent to 6 percent.

The next meeting of the MPC is scheduled on April 4 and 5, 2018.

Spread the love

Comments

Trending

%d bloggers like this: