The RBI had a little room to cut rates from the point of view of inflation, which recently started inching up and might settle within 3.8%-4.5% range for rest of FY18
The Reserve Bank of India kept the repo rate unchanged on Wednesday at 6% in its latest credit and monetary policy review, as widely anticipated given the concerns on the rising headline inflation. The RBI’s 6% repo rate, last revised in August, is lowest in nearly seven years since November 2010. “The Monetary Policy Committee (MPC) has decided to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at
6%,” the central bank said in its policy statement.
The central bank kept the policy stance neutral with the objective of limiting the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of plus/minus 2%, while supporting growth.
Earlier in August, in its last credit and monetary policy review, RBI had cut repo rate by 25 basis points to 6% for the first time in this fiscal year given the then falling inflation. The RBI, in August, raised concerns over the farm loan waiver by seven states amounting to Rs 88,000 crore, which the central bank said, would push the inflation on a permanent basis by 0.2%.
“The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.,” the RBI said in its policy statement on Wednesday.
RBI concerned over fiscal slippage, crude oil, global geopolitical escalation
“The MPC observed that CPI inflation has risen by around two percentage points since its last meeting. These price pressures have coincided with an escalation of global geopolitical uncertainty and heightened volatility in financial markets…. Such juxtaposition of risks to inflation needs to be carefully managed,” the RBI said.
“Although the domestic food price outlook remains largely stable, generalised momentum is building in prices of items excluding food, especially emanating from crude oil. The possibility of fiscal slippages may add to this momentum in the future,” the central bank added.
Five of the MPC members voted for no change in the repo rate. Dr Chetan Ghate, Dr Pami Dua, Dr Michael Debabrata Patra, Dr Viral V. Acharya, Dr Urjit R Patel were in favour of no change in the repo rate, while Dr Ravindra H Dholakia voted for a policy rate reduction of at least 25 basis points.
A surge in food prices sent India’s August CPI inflation to 3.36% — hitting a four-month high but slightly below RBI’s mid-term target of 4%. The RBI had a little room to cut rates from the point of view of inflation, which recently started inching up and might settle within 3.8%-4.5% range for rest of FY18, around the 4% target. Further, the possibility of economic stimulus widening the fiscal deficit also left the RBI with even lesser room to cut rates.
As India’s economic growth slumped to a three-year low of 5.7% in the first quarter of the FY18 due to demonetisation and the switch to the GST regime, many economists called for a rate to cut to boost growth, however, according Reuters poll of 60 economists, the “lacklustre growth and inflation hovering below the RBI’s 4% medium-term target” was not be enough to drive the RBI into action.