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Business News/ Industry / Banking/  RBI keeps key interest rates unchanged, lowers inflation forecast
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RBI keeps key interest rates unchanged, lowers inflation forecast

RBI's monetary policy committee holds repo rate at 6.25% but has softened its hawkish policy stance after retail inflation and economic growth slowed sharply

Reserve Bank of India (RBI)’s monetary policy committee has projected retail inflation at 2-3.5% in the first half of 2017-18 and 3.5-4.5% in the second half. Photo: Aniruddha Chowdhury/MintPremium
Reserve Bank of India (RBI)’s monetary policy committee has projected retail inflation at 2-3.5% in the first half of 2017-18 and 3.5-4.5% in the second half. Photo: Aniruddha Chowdhury/Mint

Mumbai: The Reserve Bank of India’s (RBI) monetary policy committee (MPC) on Wednesday kept key interest rates unchanged, but softened its hawkish policy stance after retail inflation and economic growth slowed sharply.

While the repo rate—at which the central bank infuses liquidity in the banking system—has been kept unchanged at 6.25%, RBI lowered its inflation forecast for the current fiscal. The MPC has projected headline inflation at 2-3.5% in the first half of the year and 3.5-4.5% in the second half. Economists see this as an indication that the central bank may be accommodative on the future course of rates in a bid to revive economic growth.

The decision was not unanimous. One external member of the panel, Ravindra Dholakia, a professor at Indian Institute of Management, Ahmedabad, dissented.

The RBI did cut the statutory liquidity ratio (SLR)—the portion of bank deposits that have to be invested in government bonds— by 50 basis points (bps) to 20%. One basis point is one-hundredth of a percentage point.

In February, RBI shifted its monetary policy stance to neutral from accommodative, ending the easy money policy that it had adopted since January 2015. During the same period, RBI had reduced the repo rate by 175 bps.

Retail inflation as measured by the Consumer Price Index dropped to a new record low of 2.99% in April from a nearly five-month high of 3.89% in March on a lower base effect and lower food prices. Economic growth in the fourth quarter of the fiscal year slowed to 6.1%, mirroring the impact of demonetisation.

“At the current juncture, global political and financial risks materialising into imported inflation and the disbursement of allowances under the 7th central pay commission’s award are upside risks. The date of implementation of the latter has not been announced and as such, has not been factored into the baseline projections. The implementation of the goods and services tax (GST) is not expected to have a material impact on overall inflation," the policy statement said.

RBI said it was cautious on the outlook for inflation and would wait for more data to see whether the April inflation reading is sustainable. RBI deputy governor Viral Acharya said that if the future data warrants it, the central bank may opt for an accommodative stance.

Most economists said the policy had set the stage for RBI to move its stance to accommodative or even cut rates in the latter part of the year.

“Based on the current inflation trajectory and depending on how the monsoon pans out and when the HRA (house rent allowance) implementation happens, it may open up a room for possible rate cut," said Gaurav Kapur, chief economist at IndusInd Bank.

“Though I am not entirely convinced that they will cut in August. I think they will first shift stance from neutral to possibly accommodative and then look at a rate cut," he added.

Growth concerns are expected to outweigh inflationary risks for a sizeable part of FY18 and this may prompt RBI to change its stance to accommodative in the coming months, said Rupa Rege Nitsure, group chief economist at L&T Financial Services .

RBI also revised its target for gross value added, another measure of economic growth, down by 10 basis points to 7.3%.

The replacement of demonetized currency notes with new ones should “enable a pick-up in discretionary consumer spending, especially in cash-intensive segments of the economy," the MPC statement said. “Furthermore, the reductions in banks’ lending rates post-demonetisation should support both consumption and investment demand of households and stress-free corporates."

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Published: 07 Jun 2017, 02:33 PM IST
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