The Reserve Bank of India (RBI) in its first monetary policy meeting for the fiscal year 2018-19 decided to maintain status quo with the neutral stance. From government's reaction to analysts' comments; here's all you need to know
The Reserve Bank of India (RBI) in its first monetary policy meeting for the fiscal year 2018-19 decided to maintain status quo with neutral stance even as it flagged concerns over global crude oil prices which is on the upswing again and global market volatility. From what can be understood as a dovish pause, this time the RBI lowered its inflation forecast from the range of 5.1% to 56% in the first half of the fiscal year to 4.7%-5.1% and increased the GDP growth forecast 7.2 % to 7.4 % from its February MPC statement.
Here’s all you need to know about the first MPC statement of the RBI in the fiscal year 2018-19:
In a 5-1 vote, the RBI decided to keep the repurchase agreement, or repo rate unchanged at 6% for the fourth time. This is the lowest interest rate in over seven years since November 2010. The RBI said that food inflation declined by 120 bps in February, pulled down by a sharp decline in vegetable prices, especially of onions and tomatoes, along with continuing deflation in pulses.
While Chetan Ghate, Pami Dua, Ravindra H Dholakia, Viral V Acharya and Urjit Patel voted in favour of the monetary policy decision, Michael Debabrata Patra was once again the lone hawk who voted for an increase in the policy rate of 25 basis points.
The RBI in its policy statement said that the revised MSP formula to provide one and half times of production to farmers announced in the Union Budget 2018-19 for Kharif crops may have an impact on inflation but its magnitude will be known later. It also said that staggered impact of HRA revisions under the 7th Pay Commission by various state governments may push headline inflation up.
On today’s RBI statement, the Narendra Modi government lauded the central bank for revising the inflation and the GDP growth forecast. The Finance Ministry, in a statement, said that the government welcomes this policy statement.
Commenting on the policy statement, Deloitte India lead economist Anis Chakravarty said that the inflation expectations will be determined on factors like oil price movement, the impact of MSP inclusion, fiscal slippage as GST collections remain low, and monsoon forecasts. He added that the RBI will face a greater challenge in shaping up policy perspective in the coming months as higher yields, inflationary pressures and election cycle in India and the US both are likely to lead to market volatility.
Even with RBI’s neutral stance, there was a de facto interest rate tightening in the banking system. The risk-free rate in the economy – the 10-year government security yield – jumped 40 basis points (bps) this year so far on fears of fiscal slippage. But this has corrected now due to a trimmer borrowing program announced by the government for first half of fiscal 2019 and today’s MPC decision to keep the rates on hold, Crisil said.