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RBI maintains status quo on key rates for the fourth time

Author: IANS/Wednesday, February 7, 2018/Categories: Banking & Financial Services

RBI maintains status quo on key rates for the fourth time

Mumbai, Feb 7: The Reserve Bank of India (RBI) kept its key interest rate unchanged at 6% for the third time in succession at its final bi-monthly monetary policy review of the fiscal, citing upside risks for inflation from rising global crude oil prices and other domestic factors.

Announcing the first policy review after the Union Budget 2018-19 presented last week, the RBI said its decision to keep its repo, or short term lending rate for commercial banks, unchanged is consistent with the neutral stance of the central bank aimed at achieving its median inflation target of 4%. 

"Consequently, the reverse repo rate remains at 5.75%, and the marginal standing facility (MSF) rate and the Bank Rate at 6.25%," an RBI statement said following the meeting of the six-member Monetary Policy Committee (MPC).

"We expect headline inflation to be at 5.1% in the fourth quarter (January-March), including the impact of HRA (house rent allowance) to central employees, up from the 4.6% in Q3," RBI Governor Urjit Patel told reporters here after release of the MPC statement.

The continuing rise in food and fuel prices pushed India's annual retail inflation rate over the five per cent mark in December 2017 to 5.21%, from 4.88% in November 2017.

Elaborating on the upside risks to inflation, the RBI listed the various factors.

"First, international crude oil prices have firmed up sharply since August 2017, while non-oil industrial raw material prices have also witnessed a global uptick," the MPC statement said. 

"Second, the staggered impact of HRA increases by various state governments may push up
headline inflation further in 2018-19, and potentially induce second-round effects. 

"Third, the Union Budget 2018-19 has proposed revised guidelines for arriving at the minimum support prices (MSPs) for kharif crops Fourth, the Budget has also proposed an increase in customs duty on a number of items."

"Fifth, fiscal slippage as indicated in the Budget could impinge on the inflation outlook. Sixth, the confluence of domestic fiscal developments and normalisation of monetary policy by major advanced economies could further adversely impact financing conditions and undermine the confidence of external investors," it added. 

Five members of the MPC, including the three external ones and the Governor, voted in favour of the decision, while Executive Director Michael Patra voted for an increase in the policy rate by 25 basis points. 

Noting the need for "vigilance" on inflation, the RBI also cut its earlier Gross Value Added (GVA), which excludes taxes but includes subsidies, growth forecast for the current fiscal to 6.6%, from 6.7%. 

Patel welcomed Budget 2018-19's focus on the rural and infrastructure sectors as it would support rural incomes and investment, and in turn provide a further push to aggregate demand. 

"On the downside, the deterioration in public finances risks crowding out of private financing and investment. The Committee is of the view that the nascent recovery needs to be carefully nurtured and growth put on a sustainablyhigher path through conducive and stable macro-financial management," the RBI said.
 

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Kavita Giridhar Mallya

IANS

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