Monetary policy: RBI keeps rates unchanged at 6%, lowers growth forecast | business news | Hindustan Times
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Monetary policy: RBI keeps rates unchanged at 6%, lowers growth forecast

RBI’s monetary policy committee keeps key repo rate unchanged for the third time at 6%, reverse repo rate at 5.75%, lowers economic growth projection and ups inflation forecast.

business Updated: Feb 07, 2018 15:56 IST
Agencies
Agencies
Agenices, New Delhi
(Pradeep Gaur/Mint)

The RBI’s six-member monetary policy committee (MPC) has decided to keep the policy repo rate unchanged at 6% with five out of its six members opting for status quo. The reverse repo rate has also been left unchanged at 5.75%. This is the RBI’s lowest ever repo rate since November 2010. The MPC,however, lowered its economic growth projection to 6.6% for 2017-18, from 6.7%.

At its first bi-monthly meet this year, the MPC headed by RBI governor Urjit Patel also kept its stance towards the monetary policy “neutral”, consistent with its objective of achieving “the medium term target for CPI inflation of 4% , within a band of +/- 2%, while supporting growth”, according to the MPC resolution statement.

The latest CPI numbers from December 2017 showed retail inflation was at 5.2%, well over the RBI’s stated target of 4%.

The resolution of the 6-member MPC said “the inflation outlook is clouded by several uncertainties on the upside”, flagging risks from 7th pay panel implementation in states, high oil prices, hike in customs duties and fiscal slippage to 3.5% in 2017-18 and a higher target for 2018-19.

“Fiscal slippage as indicated in the Union Budget could impinge on the inflation outlook. Apart from the direct impact on inflation, fiscal slippage has broader macro-financial implications, notably on economy-wide costs of borrowing which have already started to rise. This may feed into inflation,” the statement said.

“Fiscal slippage as indicated in the Union Budget could impinge on the inflation outlook. Apart from the direct impact on inflation, fiscal slippage has broader macro-financial implications, notably on economy-wide costs of borrowing which have already started to rise. This may feed into inflation,” the statement said.

Deterioration in public finances risks crowding out of private financing and investment, it said, adding that the nascent recovery needs to be carefully nurtured.

However, the statement added that it is too early to assess the impact of the minimum support prices hike in foodgrains and the impact on inflation.

RBI also upped its inflation forecast to 5.1% for the ongoing fourth quarter of 2017-18 and expects it to firm up further to 5.1-5.6% in first half of the next fiscal, before cooling down to 4.5-4.6% in the second half.

On the positive side, MPC said there are mitigating factors like subdued capacity utilisation and moderate growth in rural wage, while welcoming the focus of Union Budget 2018 -19 on rural and infrastructure spending.

RBI also lowered its growth target to 6.6% for the current fiscal ending on March 31, from 6.7% earlier, but said that it will accelerate to 7.2 per cent in 2018-19.

Five members of the panel, including RBI Governor, voted for a status quo while executive director Michael Patra was the lone member who wanted the key rate to be hiked.

On volatility in global financial markets, RBI said it is due to uncertainty over the pace of normalisation of the US Fed monetary policy.

A majority of watchers were expecting the MPC to go for a status quo in rates with a hawkish commentary on inflation concerns.

Inflation accelerated to 5.2% in December, from the 5 per cent level in the previous month. The RBI is bound to keep the headline price rise number at 4% with a two percentage point leeway on either side.

At the last policy review, it had raised the inflation forecast to 4.3-4.7% for the second half of the current fiscal.

Factors which can fuel price rise include a proposed increase in minimum support prices for grains, a rally in oil prices and the government deviating from the fiscal consolidation roadmap to target a wider 3.2 per cent deficit in 2018-19.

On the economic growth front, there has been some improvement as the effects of the twin blows of demonetisation and GST implementation are waning. The government expects 7-7.5% growth in 2018-19.

The RBI had switched stance to neutral from being accommodative in February last year as it saw a rise in inflation. It had last cut the repo rate by 0.25% in its August 2017 monetary policy review.