RBI lowers growth forecast to 6.7%, holds repo rate citing risk to inflation
The Reserve Bank of India lowered the growth forecast by gross value added (GVA) basis while keeping its policy rate unchanged at a near seven-year low of 6%.business Updated: Oct 04, 2017 21:52 IST
Home and auto loan rates are unlikely to change, after the Reserve Bank of India (RBI) left its key policy rate unchanged on Wednesday, citing higher risks to inflation.
The central bank slashed its growth forecast and raised its inflation forecast. Economists said rate cuts in the near term are unlikely as RBI waits for the growth and inflation situation to evolve.
On Wednesday, the six-member monetary policy committee left the repurchase (repo) rate – the rate at which RBI lends money to banks against bonds – unchanged at 6%. The decision was not unanimous. Ravindra Dholakia, one of the three external members of the panel, pressed for lowering rates by at least 25 basis points. One basis point is one-hundredth of a percentage point.
India’s economic growth decelerated to 5.7% in the quarter ended June, the slowest pace in three years, as it felt the lingering impact of the November invalidation of high-value banknotes. Production cuts and destocking ahead of the 1 July implementation of the Goods and Services Tax (GST) also contributed to the slowdown.
Consumer price inflation quickened in August to 3.36% from 2.36% a month ago. The RBI cut the repo rate in its August policy by 25 basis points.
“From the borrowers’ standpoint, there is not going to be any change in the interest rates. Interest rates will largely remain where they are right now,” said Dharma Kirti Joshi, chief economist at rating company Crisil Ltd. “RBI is assessing if the slowdown in growth is a temporary or a long-lasting one. If there is more bad news on the growth front and RBI’s inflation estimate is undershot, doors for a rate cut could open up.”
The central bank cut its growth projections for gross value added, a measure of economic output, to 6.7% from 7.3% for the current financial year. It said that the implementation of the goods and services tax has had an adverse impact on economic growth. This may further delay the revival of investment activity, which is already hampered by stressed balance sheets of banks and companies, the monetary policy committee said in its resolution.
Still, RBI governor Urjit Patel also pointed to a “possibility that the cyclical upturn will happen in the next two quarters.” At a press briefing, he cited an improvement in high frequency economic indicators (such as auto sales or flight ticket purchases) and suggested that rates need not be cut at the moment.
That said, the RBI also reiterated the need to revive sluggish private sector investment. It listed several measures to boost growth such as building more infrastructure, restart stalled investment projects, simplify the GST and accelerate the rollout of the affordable housing programme.
The central bank is worried about inflation accelerating. The monetary policy panel listed several upside risks to inflation such as farm loan waivers, states’ implementation of pay commission allowances, and price revisions following GST and rising international crude prices. It raised its forecast for the second half of this year to 4.2-2.6% from 4-4.5% earlier.
The central bank also warned of the dangers of fiscal slippages (jargon for government exceeding limits set by the budget) adding to inflation momentum in the future.
Soumya Kanti Ghosh, group chief economic adviser at State Bank of India (SBI), said that if second quarter GDP growth number declines and if inflation does not quicken sharply, there will be room to cut rates towards the end of March.
“If banks go for further cut in deposit rates, there will be space for reduction in lending rates,” said Ghosh.