RBI keeps repo rate unchanged at 6.5%; shifts stance to ‘calibrated tightening’

08 Oct 2018 Evaluate

After two successive rate hikes, the Reserve Bank of India (RBI), surprising the street expectation of at least a quarter percentage rate hike, has kept its repo rate, the rate it lends to commercial banks, unchanged at 6.5% in its fourth bi-monthly monetary policy review of 2018-19. It repo rate has been kept unchanged citing a benign inflation trajectory and downward revision to inflation projections. However, the Central Bank has changed its stance from neutral to ‘calibrated tightening’. Consequently, the reverse repo rate under the liquidity adjustment facility (LAF) stood at 6.25%, and the marginal standing facility (MSF) rate and the Bank Rate at 6.75%.

The decision of the monetary policy committee (MPC) is consistent with the stance of calibrated tightening 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. It flagged off a list of upside risks to inflation even as it slashed its forecast for the headline number. On the inflation front, the RBI has projected inflation at 4.0% in Q2:2018-19, 3.9-4.5% in second half (H2) and 4.8% in Q1:2019-20, with risks somewhat to the upside. Excluding the HRA impact, consumber price index (CPI) inflation is projected at 3.7% in Q2:2018-19, 3.8 - 4.5% in H2 and 4.8% in Q1:2019-20.

The RBI said inflation outlook is expected to be influenced by several factors as food inflation remained unusually benign, which imparts a downward bias to its trajectory in the second half of the year. Inflation in key food items such as pulses, edible oils, sugar, fruits and vegetables remains exceptionally soft at this juncture. The risk to food inflation from spatially and temporally uneven rainfall is also mitigated, as confirmed by the first advance estimates that have placed production of major kharif crops for 2018-19 higher than last year’s record. Another factors include, the price of the Indian basket of crude oil has increased sharply, by $13 a barrel, since the last resolution. Besides, international financial markets remained volatile with emerging market economies (EMEs) currencies depreciating significantly.

On the economic front, the Central Bank has retained its gross domestic product (GDP) growth projection at 7.4% for 2018-19 as in the August resolution (7.4% in Q2 and 7.1-7.3% in second half), with risks broadly balanced; the path in the August resolution was 7.5% in Q2:2018-19 and 7.3-7.4% in H2. GDP growth for Q1:2019-20 is now projected marginally lower at 7.4% as against 7.5% in the August resolution, mainly due to the strong base effect.

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