Driven by uncertainties surrounding inflation and determined to keep the CPI inflation close to 4% on a durable basis, the Reserve Bank of India on Wednesday kept repo rate unchanged at 6.25%, as was widely expected.
Driven by uncertainties surrounding inflation and determined to keep the CPI inflation close to 4% on a durable basis, the Reserve Bank of India on Wednesday kept repo rate unchanged at 6.25%, as was widely expected. The six-member Monetary Policy Committee, which did not want to take a ‘premature’ action, chose to wait to see how inflation behaves later this year. However, the RBI cut the SLR (statutory liquidity ratio) by 50 basis points to 20%.
Most experts had expected that the RBI would not change key policy interest rates as it would adopt a wait and watch policy to see how inflation plays out when GST, the nation’s biggest tax reform, is implemented from 1 July. On the other hand, the government, for sure, was rooting for a rate cut to boost falling GDP growth rate, down to 7.1 percent for the Financial Year 2016-17 from 8 percent in the previous fiscal year.
Here are the highlights of RBI’s second bi-monthly monetary and credit policy for the current financial year 2017-18:
- Repo rate unchanged at 6.25%; SLR cut 50 basis points to 20% with effect from June 24, as RBI keen to avoid ‘premature’ action at this stage; says premature action will result in a loss of credibility.
- Monetary Policy Committee focused on keeping CPI inflation close to 4% on a durable basis keeping in mind output gap; needs to closely monitor underlying inflation pressure; will need to assess if low inflation momentum will endure. GST rollout may not have material impact on inflation.
- RBI trims inflation projections for the current fiscal year 2017-18. RBI sees CPI inflation remaining in the range of 2%-3.5% in the first half, lower that 4.5% projected earlier; and rising to 3.5%-4.5% in the second half, albeit down from 5% seen earlier.
- RBI says April inflation surprised on the downside but adds that the reading imparted ‘considerable uncertainty’.
- Farm loan waiver is a path that needs to be tread carefully; has raised risk of slippages; recapitalisation of banks must be stepped up for credit growth.
- New WPI, IIP series present much better picture of economy; recent GDP data shows that economy started slowing before demonetisation; effects of note-ban are sector specific and transient; RBI Governor Urjit Patel says GDP slowdown is more due to fundamental factors that the government and policymakers need to address urgently.
- The current state of the economy underscores the need to revive private investment, restore banking sector health and remove infrastructural bottlenecks.
- RBI Deputy Governor B P Kanungo says it is not fair to say that there is cash shortage on longer term basis; Kanungo says 82.6% of economy has been remonetised as per latest data.
- MPC members decline government’s request to meet before the policy; experts hail MPC’s move to preserve institutional autonomy. Five of the six MPC (Monetary Policy Committee) members voted for status quo on rates, while one was not in favour.
- RBI policy decision consistent with ‘neutral’ stance.