A long pause
While RBI’s monetary policy committee acknowledged the output gap dynamics, it decided to keep the focus on inflation and maintained status quo
As was widely expected by financial markets, the monetary policy committee of the Reserve Bank of India on Wednesday decided to keep policy rates unchanged.
This newspaper had argued earlier this week that the persistence of the output gap is a bigger worry at the moment than inflation going out of control. While the committee acknowledged the output gap dynamics, it decided to keep the focus on inflation. It highlighted inflation risks emanating from factors such as the increase in house rent allowance and rising food and fuel prices. It also highlighted the risk of fiscal slippage on account of farm loan waivers, reduction in excise duty and value-added tax on petroleum products, and a possible shortfall in revenues because of reduction in goods and services tax rates.
Overall, the statement suggests that rates will remain on hold in the foreseeable future. Going forward, while the government has indicated that it intends to keep the deficit close to the target, the key indicator to watch out for will be crude prices.
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