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Monetary Policy: RBI keeps repo rate unchanged at 6 per cent, sees inflation rising in coming months

The MPC also kept reverse repo rate under the LAF unchanged at 5.75 per cent and marginal standing facility (MSF) rate and the Bank Rate at 6.25 per cent.
RBI Governor Urjit Patel - India TV Source: PTI
Edited by: India TV Business Desk Mumbai December 06, 2017 15:21 IST

Maintaining a hawkish stance, the Reserve Bank of India today maintained status quo on key interest rates even as revised its inflation forecast upwards.

At its penultimate monetary policy review of the fiscal, the six-member Monetary Policy Committee (MPC) of the RBI kept the short-term lending rate unchanged at 6 per cent in its fifth bi-monthly policy review of the fiscal year.

Five of six MPC members voted in favour of a status quo, the RBI statement said, adding that MPC member Ravindra H. Dholakia had voted for a policy rate reduction of 25 basis points.

The RBI also maintained its projection for FY18 real GVA growth at 6.7 per cent, saying the risks are evenly balanced. 

Addressing the media, RBI Governor Urjit Patel said the MPC took note of pressures from food and fuel prices and that it was committed to keeping headline inflation at 4 percent.

“Farm loan waiver, partial roll back of duty on fuel, cut in GST rates on several items may result in fiscal slippage,” RBI Governor Urjit Patel has warned.

The RBI has also left the reverse repo rate under the LAF unchanged at 5.75 per cent and marginal standing facility (MSF) rate and the Bank Rate at 6.25 per cent.

The RBI's neutral stance is in line with what most surveys had projected. A majority of the economists had predicted the RBI holding key interest rates. According to a Bloomberg survey, 42 of the 48 economists see the repo rate, or the rate at which banks borrow from the RBI, unchanged at 6 per cent.

At its previous bi-monthly policy review in October, the RBI had maintained status quo on its repo rate at 6 per cent, citing risks to inflation and uncertainties on the external and fiscal fronts.

It had reduced the repurchase rate by 0.25 percentage points to 6 per cent earlier in August.

Japanese financial services major Nomura said in a report that input cost pressures are marginally higher now, which along with higher food inflation is likely to push retail inflation slightly above the RBI's target of 4 per cent in November and beyond.

"We expect a hawkish hold from the RBI..and policy rates to remain unchanged through 2018," it said.

Economy on the Rebound

After five successive quarters of decline, India’s GDP growth recovered to 6.3 percent in July-September from a year ago. It had clocked 5.7 per cent in the previous quarter, the lowest under the Narendra Modi government, mainly on the twin impact of demonetisation and the rollout of the Goods and Services Tax. Rise in the country’s manufacturing was the major contributor behind this recovery.

However, concerns remain over the recovery remain with capacity utilization still hovering at around 70 per cent, signaling slack demand conditions. Credit remains subdued and a private gauge on Tuesday showed the dominant services sector contracted in November, raising concerns about the pace of recovery.

Goldman Sachs, however, sees the government’s $32 billion bank repaitalisation plan as a game-changer and pegged India’s growth rate at 8 per cent in FY19.

The Inflation Conundrum

Data released in November showed that India's annual rate of inflation based on wholesale prices (wholesale price index) rose to 3.59 per cent in October due to an exponential rise in food prices.

In addition, the consumer price index (CPI), or retail, inflation for October rose to 3.58 per cent from 3.28 per cent in September.

Domestic credit rating agency ICRA said the MPC would leave the repo rate unchanged at six per cent "in a non-unanimous decision in the December 2017 policy review, given the expectation of a further rise in the CPI inflation in the coming months".

In its previous monetary policy review, the central bank had stated that it expects inflation to rise from the then-level of around 3.3 per cent "and range between 4.2-4.6 per cent in the second half of this year".

RBI Governor Urjit Patel had said the MPC remains committed to keeping headline inflation close to four per cent "on a durable basis".

Monetary Policy Review: RBI keeps repo rate unchanged at 6 per cent, sees inflation rising in coming months

Maintaining a hawkish stance, the Reserve Bank of India today maintained status quo on key interest rates even as revised its inflation forecast upwards.

At its penultimate monetary policy review of the fiscal, the Monetary Policy Committee (MPC) of the Reserve Bank of India held the policy repo rate under liquidity adjustment facility (LAF) unchanged at 6.0 per cent.

Consequently, reverse repo rate under the LAF remains unchanged at 5.75 per cent and marginal standing facility (MSF) rate and the Bank Rate at 6.25 per cent, the RBI said.

The MPC, that began its two-day meet on Tuesday, announced its decision at 2:30 p.m. in Mumbai. A press conference is expected anytime now.

Most surveys had projected a majority view of the RBI holding key interest rates. According to a Bloomberg survey, 42 of the 48 economists see the repo rate, or the rate at which banks borrow from the RBI, unchanged at 6 per cent.

Also Read: RBI expected to hold key interest rate in MPC meet on Wednesday

At its previous bi-monthly policy review in October, the RBI had maintained status quo on its repo rate at 6 per cent, citing risks to inflation and uncertainties on the external and fiscal fronts.

It had reduced the repurchase rate by 0.25 percentage points to 6 per cent earlier in August.

Japanese financial services major Nomura said in a report that input cost pressures are marginally higher now, which along with higher food inflation is likely to push retail inflation slightly above the RBI's target of 4 per cent in November and beyond.

"We expect a hawkish hold from the RBI..and policy rates to remain unchanged through 2018," it said.

Economy on the Rebound

After five successive quarters of decline, India’s GDP growth recovered to 6.3 percent in July-September from a year ago. It had clocked 5.7 per cent in the previous quarter, the lowest under the Narendra Modi government, mainly on the twin impact of demonetisation and the rollout of the Goods and Services Tax. Rise in the country’s manufacturing was the major contributor behind this recovery.

However, concerns remain over the recovery remain with capacity utilization still hovering at around 70 per cent, signaling slack demand conditions. Credit remains subdued and a private gauge on Tuesday showed the dominant services sector contracted in November, raising concerns about the pace of recovery.

Goldman Sachs, however, sees the government’s $32 billion bank repaitalisation plan as a game-changer and pegged India’s growth rate at 8 per cent in FY19.

The Inflation Conundrum

Data released in November showed that India's annual rate of inflation based on wholesale prices (wholesale price index) rose to 3.59 per cent in October due to an exponential rise in food prices.

In addition, the consumer price index (CPI), or retail, inflation for October rose to 3.58 per cent from 3.28 per cent in September.

Domestic credit rating agency ICRA said the MPC would leave the repo rate unchanged at six per cent "in a non-unanimous decision in the December 2017 policy review, given the expectation of a further rise in the CPI inflation in the coming months".

In its previous monetary policy review, the central bank had stated that it expects inflation to rise from the then-level of around 3.3 per cent "and range between 4.2-4.6 per cent in the second half of this year".

RBI Governor Urjit Patel had said the MPC remains committed to keeping headline inflation close to four per cent "on a durable basis".

 

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