RBI keeps interest rates unchanged, but softens stance to lower inflation target
MUMBAI: The Reserve Bank of India’s (RBI) monetary policy committee on Wednesday kept key interest rates unchanged, but softened its hawkish 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%, the 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 — the portion of bank deposits that have to be invested in government bonds — by 50 basis points to 20%. One basis point is one-hundredth of a percentage point.
In February, the 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, the RBI had reduced the repo rate by 175 basis points.
Retail inflation as measured by the Consumer Price Index dropped to a new record low of 2.99% in April from a nearly fivemonth 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.
The RBI said that it was cautious on the outlook for inflation and will 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 RBI may opt for an accommodative stance.
Most economists said the policy had set the stage for the 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.