Growth to revive, inflation risks remain: RBI Markets extend losses as central bank holds rate
NO CHANGE Central bank keeps interest rates unchanged for third time in a row MUMBAI: BENGALURU:Profitability
The Reserve Bank on Wednesday kept interest rates unchanged for the third time in a row saying that higher government spending would accelerate inflation, and warned of risks from wider fiscal deficit.
The 6-member Monetary Policy Committee (MPC), headed by RBI (Reserve Bank of India) governor Urjit Patel, retained the repurchase or repo rate at 6% and reverse repo rate at 5.75%. It kept a neutral stance at its 6th and the last bi- monthly monetary policy review of the current fiscal, 2017-18.
Inflation, which surged to a 17-month high of 5.21% in December, is likely to accelerate further after budget for 2018-19 widened fiscal deficit target so as to finance higher rural spend and mega healthcare plan.
“We are still awaiting some of specifics on that in terms of costing it... we have said that there could be impact but we have not said how much,” Patel said. “There is not enough information at the moment about what the costing would be.”
The Union Budget 2018-19 would stoke demand but worsening public finances may crowd out private funding and investment, RBI said in a statement.
RBI upped its inflation forecast to 5.1% for the current fourth quarter of the 2017-18 fiscal ending March 31. It expects inflation to firm up further to 5.1-5.6% in first half of the next fiscal, before cooling down to 4.5-4.6% in the second half. There is “need for vigilance around the evolving inflation scenario in the coming months,” it said. “Fiscal slippage as indicated in the Union budget could impinge on the inflation outlook.”
Upside risks to inflation include oil prices and the staggered impact of the implementation of HRA by various state governments. Patel and four other MPC members voted for status quo on the interest rate while one member, Michael Patra favoured a 25 basis point rate hike.
Stating that it stays committed to keep headline inflation close to 4%, RBI put the Gross Value Added (GVA) — a key measure of growth — at 7.2% for the next fiscal year with risks evenly balanced. For the current fiscal, it lowered the growth rate to 6.6% from previously projected 6.7%. This compares to 6.5% forecast by the government, down from 7.1% a year earlier.
“Apart from the direct impact on inflation, fiscal slippage has broader macro-financial implications, notably on economywide costs of borrowing which have already started to rise. This may feed into inflation,” RBI said. MPC was of “the view that the nascent recovery needs to be carefully nurtured and growth put on a sustainably higher path through conducive and stable macro-financial management.”
The resolution of the MPC said “the inflation outlook is clouded by several uncertainties on the upside”, flagging risks from 7th pay panel implementation in states, high oil prices, hike in customs duties and fiscal slippage to 3.5% in 2017-18 and a higher target for 2018-19.
“Fiscal slippage as indicated in the Union budget could impinge on the inflation outlook. Apart from the direct impact on inflation, fiscal slippage has broader macro-financial implications, notably on economywide costs of borrowing which have already started to rise. This may feed into inflation,” it warned. RBI said however that it is too early to assess the impact of the minimum support prices hike in foodgrains and the impact on inflation. On the positive side, MPC said there are mitigating factors like subdued capacity utilisation and moderate growth in rural wage, while welcoming the focus of Union budget 2018 -19 on rural and infrastructure spending.
On volatility in global financial markets, RBI said it is due to uncertainty over the pace of normalisation of the US Fed monetary policy. A majority of watchers were expecting the MPC to go for a status quo in rates with a hawkish commentary on inflation concerns. At the last policy review, it had raised the inflation forecast to 4.3-4.7% for the second half of the current fiscal.
Benchmarks ended in the red for the seventh session on the trot on Wednesday as the Reserve Bank of India (RBI) left the policy rate unchanged but lowered growth projection for the fiscal. In see-saw trade, the BSE Sensex fell over 113 points to finish at 34,082.71, while the broader NSE Nifty shed 21.55 points to 10,476.70.
The central bank kept the interest rate unchanged at 6% as widely expected and maintained its ‘neutral’ stance. However, it lowered economic growth projection to 6.6% for 2017-18, from 6.7%, while flagging risks of hardening inflation and wider fiscal deficit.
On the global front, traders heaved a sigh of relief as the Dow Jones finished solidly higher after wild price swings. The 30-share Sensex, which had bounced over 470 points in the opening trade in sync with positive global cues, slipped into the negative zone as participants booked profits at higher levels and hit a low of 34,008.42. It finally finished at 34,082.71 points, down 113.23 points, or 0.33%. The barometer has now lost over 2,200 points in seven straight sessions. The wider NSE Nifty too ended 21.55 points, or 0.21% down at 10,476.70. Intra-day, it shuttled between 10,614 and 10,446.40.
“Asexpected,RBIcontinuedto stay on the neutral stance awaiting more upcoming domestic and global macro data, and seeing some sanity in the bond market. But prevailing inflationary pressure and fiscal slippage may lead to a hawkish view in the near future. Market reacted quite negatively while Bank Nifty under-
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performed owing to deferment in credit cycle due to subdued capacity utilisation in the economy and hardening bond yield,” said Vinod Nair, head of research, Geojit Financial Services.
A rally in select rate-sensitive realty and auto counters helped both the key indices recover from their day’s lows. Meanwhile, foreign portfolio investors (FPIs) sold shares worth ₹2,326.10 crore on Tuesday, while domestic institutional investors (DIIs) bought equities to the tune of ₹1,699.74 crore, as per provisional data released by the stock exchanges. In sectoral terms, the banking index dipped 0.43% as shares of Punjab National Bank, Yes Bank, HDFC Bank, Axis Bank, IndusInd Bank and Bank of Baroda shed up to 2.18%. However, ICICI Bank, SBI and Federal Bank edged higher.
Other sectoral indices such as telecom, tech, IT and capital goods also declined, falling up to 1.12%. In contrast, the broader markets were back in better shape, with the small-cap index rising 1.95% and the mid-cap index inching up by 0.43%.
Oil & gas, realty, PSU, infrastructure, healthcare, consumer durables, power, FMCG and metal turned positive. Major losers were L&T, TCS, Bharti Airtel, Wipro, Hindustan Unilever, M&M, Maruti Suzuki, Tata Steel, Sun Pharma, NTPC and HDFC Ltd. In the Asian region, Japan’s Nikkei ended 0.16% higher, while Hong Kong’s Hang Seng shed 0.89%. China’s Shanghai Index too fell 1.82%. European markets were trading in the positive terrain in their early deals after the recent global markets turmoil. Frankfurt’s DAX 30 was up 0.66% while Paris CAC 40 gained 0.68% in their early deals. London’s FTSE too advanced 0.55%.