RBI Monetary Policy: Contrary to street expectations, the Reserve Bank of India’s monetary policy committee (MPC) kept repo rate unchanged at 6.5% on Friday in its fourth bi-monthly monetary policy review for this fiscal year. Over two-thirds of 61 economists had said in a Reuters poll the RBI would hike the repo rate at least once by the end of 2018, and over half of them had expected a 25 basis points raise. The development will come as a relief to loan seekers and borrowers, who were bracing for a 25 basis points increase, which could have led to a rise in borrowing costs. Why did RBI keep repo rates unchaged? We take a look at key reasons.
While keeping the key policy rate unchaged, RBI has changed its stance from ‘Nuetral’ to ‘caliberated tightening,’ of monetary policy, in line with its objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth. We take a look at reasons behind RBI’s latest decision.
Declining retail, food inflation
Last time around in August, RBI had cited upward pressure to inflation and uncertainty from crude oil prices as major reasons for hiking the interest rates. This time, the central bank noted that actual inflation outcomes, especially in August, were below projections as the expected seasonal increase in food prices did not materialise and inflation excluding food and fuel moderated.
RBI said that the retail inflation, measured by on-year change in the CPI, fell from 4.9% in June to 3.7% in August, dragged down by a decline in food inflation. “Some softening of inflation in items other than food and fuel also contributed to the decline. Adjusting for the estimated impact of an increase in house rent allowance (HRA) for central government employees, headline inflation was at 3.4%,” RBI noted.
Further, inflation in the food and beverages group also declined sharply in the absence of seasonal uptick in prices of fruits and vegetables. “The MPC reiterates its commitment to achieving the medium-term target for headline inflation of 4 per cent on a durable basis,” RBI said.
Robust GDP growth
“On the domestic front, real gross domestic product (GDP) growth surged to a nine quarter high of 8.2% in Q1:2018-19, extending the sequential acceleration to four successive quarters. Of the constituents, gross fixed capital formation (GFCF) expanded by double digits for the second consecutive quarter, driven by the government’s focus on the road sector and affordable housing,” RBI noted.
Private consumption and investment activity
In its press release, RBI noted that private consumption has remained robust and is likely to be sustained even as the recent rise in oil prices may have a bearing on disposable incomes. “Improving capacity utilisation, larger FDI inflows and increased financial resources to the corporate sector augur well for investment activity. However, both global and domestic financial conditions have tightened, which may dampen investment activity,” RBI said.