RBI keeps repo rate unchanged at 6%; estimates inflation at 5.1% for Q4 FY18

08 Feb 2018 Evaluate

In view of increasing inflation, the Reserve Bank of India (RBI) in its sixth bi-monthly policy has kept the repo rate under the liquidity adjustment facility (LAF) unchanged at 6% for the third straight meeting. Consequently, the reverse repo rate under the LAF remains at 5.75%, and the marginal standing facility (MSF) rate and the Bank Rate at 6.25%. The Central Bank’s stance was largely along expected lines. The decision of the MPC is consistent with the neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth.

The Monetary Policy Committee (MPC) of RBI chaired by RBI Governor Urijit Patel has stated that hardening crude oil prices, the hike in minimum support prices (MSP) for the summer-sown kharif crop for this year, greater house rent payouts to millions of state government employees and higher import duty on several items can fan inflation. It noted that the inflation outlook is clouded by several uncertainties on the upside. First, the staggered impact of house rent allowances (HRA) increases by various state governments may push up headline inflation further over the baseline in 2018-19, and potentially induce second-round effects.

The Central Bank also said that fiscal slippage as indicated in the Union Budget could impinge on the inflation outlook. It added that 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 and this may feed into inflation. The RBI projected Q4 FY18 retail inflation, the main price gauge that the RBI tracks for interest rate-related decisions, at 5.1%, considering factors like rising petrol and diesel prices in January 2018, increase in HRA and less than usual moderation in seasonal food prices. It also projected inflation in the range of 4.3-4.7% for the second half (H2) of FY18. It also projected retail inflation in the range of 5.1-5.6% for the first half (H1) of 2018-19 and 4.5-4.6% in H2.

On the growth front, the RBI has lowered the India’s economic growth projection for the current fiscal year 2017-18 to 6.6% from its previous projection of 6.7%, in light of fresh production and corporate income data. But, it said that growth will accelerate to 7.2% in the fiscal year 2018-19, as the roll-out of goods and services tax (GST) stabilises and credit off-take improves. It also projected gross value added (GVA) growth in the range of 7.3-7.4% in H1 FY19 and 7.1-7.2% in H2 FY19 with risks evenly balanced.

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