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RBI keeps repo rate unchanged at 6%; downgrades GVA growth forecast to 6.7%

05 Oct 2017 Evaluate

The Reserve Bank of India (RBI), amid lingering concerns over inflation, maintained the status quo in its fourth Bi-Monthly Monetary Policy Statement, 2017-18 and kept the policy repo rate, at which it lends to banks, unchanged at a near seven-year low of 6.0 percent, despite a sharp slowdown in economic growth. Consequently, the reverse repo rate, at which RBI borrows from banks, remains at 5.75 percent, and the marginal standing facility (MSF) rate and the Bank Rate at 6.25 percent. The committee also did not tweak the cash reserve ratio (CRR), which remained unchanged at 4 percent, however statutory liquidity ratio (SLR) was cut by 50 basis points to 19.5 percent from 20 percent, which will be effective from October 14.

The six member monetary policy committee (MPC), headed by RBI governor Urjit Patel, also decided to keep the policy stance neutral and monitor incoming data closely in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 percent. The MPC expects inflation to rise from current level and range between 4.2-4.6 percent in the second half of this year. It added that various structural reforms introduced in the recent period will likely be growth augmenting over the medium-to-long-term by improving the business environment, enhancing transparency and increasing formalisation of the economy.

Acknowledging sluggish economic activity, the central bank revised the projection of real gross value added (GVA) growth forecast downward to 6.7 percent from an August 2017 projection of 7.3 percent, with risks evenly balanced. It also said that teething problems linked to the Goods and Services Tax (GST) and bandwidth constraints may get resolved relatively soon, allowing growth to accelerate in second half. It further said that the GST implementation had an adverse impact, rendering prospects for the manufacturing sector uncertain in the short term. This may further delay the revival of investment activity, which is already hampered by stressed balance sheets of banks and corporates.

The RBI said that it is imperative to reinvigorate investment activity which, in turn, would revive the demand for bank credit by industry as existing capacities get utilised and the requirements of new capacity open up to be financed. It added that recapitalising public sector banks adequately will ensure that credit flows to the productive sectors are not impeded and growth impulses not restrained. However, it cautioned that farm loan waivers and fiscal stimulus could push up the combined (Centre plus States) fiscal deficit to gross domestic product (GDP) ratio by around 100 basis points in 2017-18.


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