RBI keeps repo rate unchanged at 6%; lowers inflation forecast for FY19

06 Apr 2018 Evaluate

The Reserve Bank of India (RBI), in its first bi-monthly monetary policy review of 2018-19 has maintained status quo on repo rate for the fourth time in a row. The RBI, has kept repo rate under the liquidity adjustment facility (LAF) unchanged at 6% and has retained its ‘neutral’ stance. Consequently, the reverse repo rate under the LAF remained at 5.75%, and the marginal standing facility (MSF) rate and the Bank Rate at 6.25%. The monetary policy committee (MPC) has reiterated its commitment to achieving the medium-term target for headline inflation of 4% on a durable basis.

The RBI’s six-member MPC, headed by Governor Urjit Patel, has revised its CPI inflation forecast to 4.7-5.1% in H12018-19 and 4.4% in H2, including the HRA impact for central government employees, with risks tilted to the upside. Earlier, it had forecasted inflation in the range of 5.1-5.6% in H12018-19 and 4.5-4.6% in H2. Listing down the factors that influence the inflation outlook, it said with the sharp moderation in food prices in February-March, the inflation trajectory in H1 FY19 is expected to be lower than the projection in February. It also said that Indian domestic demand is expected to strengthen during the course of the year and the statistical impact of an increase in HRA for central government employees under the 7th CPC will continue till mid-2018, and gradually dissipate thereafter.

However, the MPC also listed several uncertainties surrounding the baseline inflation path. It said that revised formula for MSP as announced in the Union Budget 2018-19 for kharif crops may have an impact on inflation, the staggered impact of HRA revisions by various state governments may push headline inflation up. It also said that in case there is any further fiscal slippage from the Union Budget estimates for FY19 or the medium-term path, it could adversely impact the outlook on inflation.

On the growth front, the Central Bank has projected that India’s Gross Domestic Product (GDP) growth to strengthen from 6.6% in FY18 to 7.4% in FY19. It also said that for the first half of the current fiscal year GDP will be in the range of 7.3-7.4%, while in second half it will be in the range of 7.3-7.6%, with risks evenly balanced. It further said that factors that are expected to accelerate the pace of economic activity in FY19 includes, the clearer signs of revival in investment activity as reflected in the sustained expansion in capital goods production and still rising imports, albeit at a slower pace than in January. Also, global demand has been improving, which should encourage exports and boost fresh investment.

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