RBI ups inflation forecast, leaves rates unchanged
POLICY POINTS Future calls on rate direction will be data driven, says Patel MUMBAI:
The Reserve Bank of India’s (RBI) monetary policy committee (MPC) kept the key interest rate unchanged on Wednesday noting risks to inflation, but expressed optimism that growth had bottomed out.
The decision was in line with market expectations. The repurchase rate—the rate at which it infuses liquidity in the banking system— was left unchanged at 6%. RBI also maintained its neutral policy stance, which essentially means future calls on rate direction would be data driven and in either direction. Economists said that they saw RBI going on a prolonged pause.
The rate setting panel raised its fiscal second half inflation estimate range marginally to 4.3-4.7%.
The central bank has a medium-term consumer price indexbased (CPI) inflation target of 4%.
The panel noted that there were factors that threatened to push up inflation in the near term such as rising food and fuel prices, increase in input costs, implementation of farm loan waivers by select states. It also highlighted the partial roll back of excise duty on petroleum products and the decrease in revenue on account of the cut in goods and services tax (GST) rates posing dangers to the fiscal deficit target, which could push inflation.
At the end of October, the centre’s fiscal deficit had hit 96.1% of the budget estimate for this financial year. In the previous meeting in October, RBI had also maintained status quo on rates. Since then, CPI inflation accelerated to 3.58% in October, the fastest pace in seven months, because of rising food and fuel prices.
The rate decision was not unanimous. Ravindra Dholakia, one of the three external members of the MPC, suggested a rate cut of 25 basis points (bps). One basis point is one-hundredth of a percentage point.
RBI retained its fiscal 2018 forecast for growth in gross value added (GVA), a measure of economic output, at 6.7%.
The panel noted several factors that could push growth in the coming quarters such as the amount of funds raised from the capital markets, the improvement in the ease of doing business rankings, large distressed borrowers being referred for bankruptcy proceedings and the ₹2.11 lakh-crore bank recapitalisation programme.
It noted that these could get a further shot in the arm if banks passed on past rate changes on to lending rates on outstanding loans.
RBI reiterated that it was committed to keep headline inflation close to 4% on durable basis.
“We have a neutral stance, which means that depending on the data flow in the coming months and quarters will determine what we do regarding the policy. So the neutral stance is there for a reason that all possibilities are on the table, and we would look carefully with both the inflation data and the growth data in the coming months,” RBI governor Urjit Patel said.
According to Gaurav Kapur, chief economist at IndusInd Bank, this policy reiterates his expectation of a prolonged pause but the mention of the output gap, the difference between the actual output of an economy and its potential, shows that the MPC is concerned about growth too.
“Going purely by the upside risks to inflation would have warranted a change in monetary policy stance to more hawkish. But they stuck to neutral because of the negative output gap. Going ahead, with expectation of CPI remaining above 4%, I think they will hold onto rates, unless the Union budget turns out to be populist and there is indication of significant fiscal slippage.”