Here is what RBI did to keep your inflation bill down

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Published: April 6, 2017 6:49:27 PM

Although under control for now, inflation appears to be a major concern for the RBI. Going forward the RBI expects inflation to be around 4.5% in the first half of FY18 and 5% in the second half with risks balanced on both sides. Still upside risks to the baseline projection remain.

 

“While inflation has ticked up in its latest reading, its path through 2017-18 appears uneven and challenged by upside risks and unfavourable base effects towards the second half of the year.

Although under control for now, inflation appears to be a major concern for the RBI. Going forward the RBI expects inflation to be around 4.5% in the first half of FY18 and 5% in the second half with risks balanced on both sides. Still upside risks to the baseline projection remain.

“While inflation has ticked up in its latest reading, its path through 2017-18 appears uneven and challenged by upside risks and unfavourable base effects towards the second half of the year. Moreover, underlying inflation pressures persist, especially in prices of services. Input cost pressures are gradually bringing back pricing power to enterprises as demand conditions improve,” the RBI said in its First Bi-monthly Monetary Policy Statement today.

According to it, the Monetary Policy Committee (MPC) remains committed to bringing headline inflation closer to 4.0 per cent on a durable basis and in a calibrated manner. Accordingly, inflation developments have to be closely and continuously monitored, with food price pressures kept in check so that inflation expectations can be re-anchored. At the same time, the output gap is gradually closing. Consequently, aggregate demand pressures could build up, with implications for the inflation trajectory.

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Against this backdrop, the MPC decided to keep the policy rate unchanged in this review while persevering with a neutral stance. The future course of monetary policy will largely depend on incoming data on how macroeconomic conditions are evolving.

Banks have reduced lending rates, although further scope for a more complete transmission of policy impulses remains, including for small savings/administered rates.

“It is in this context that greater clarity about liquidity management is being provided, even as surplus liquidity is being steadily drained out. Along with rebalancing liquidity conditions, it will be the Reserve Bank’s endeavour to put the resolution of banks’ stressed assets on a firm footing and create congenial conditions for bank credit to revive and flow to productive sectors of the economy,” the RBI said.

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Industry experts say that the hike in reserve repo rate to 6 per cent is also aimed at draining out the excess liquidity from the system and keeping inflation in check.

“As expected, the RBI kept key repo rate unchanged at 6.25%. However, it narrowed the LAF corridor by 25 bps by increasing reverse repo to 6% and bringing down MSF and bank rate to 6.50%. This was done to manage the overnight rate within a narrow corridor in light of extremely high liquidity.

“The RBI indicated that it is committed to bring down liquidity to neutral and will use tools like MSS and OMO to manage liquidity. Going forward, it expects inflation to be around 4.5% in the first half on FY18 and 5% in the second half with risks balanced on both sides. The future course of policy action of the RBI will, however, depend on incoming macro-economic data and evolving global conditions and local conditions like oil prices, monsoons and impact of GST on inflation,” said Avnish Jain, Head– Fixed Income, Canara Robeco.

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