RBI keeps pol­icy rate un­changed an­tic­i­pat­ing re­tail in­fla­tion risk

Cen­tral bank slashes its growth pro­jec­tions for the cur­rent fis­cal, raises its in­fla­tion pro­jec­tions

Mint Asia ST - - News - BAY LEKH A NGRE

The Re­serve Bank of In­dia (RBI) on Wed­nes­day, 4 Oc­to­ber, kept in­ter­est rates un­changed be­cause it an­tic­i­pates up­side risks to re­tail in­fla­tion. It also slashed its growth pro­jec­tions for the cur­rent fis­cal and raised its in­fla­tion pro­jec­tions.

The six-mem­ber mone­tary pol­icy com­mit­tee (MPC) kept the re­pur­chase rate—the rate at which the cen­tral bank in­fuses liq­uid­ity in the bank­ing sys­tem—un­changed at 6%.

The de­ci­sion was not unan­i­mous. Ravin­dra Dho­lakia, one of the three ex­ter­nal mem­bers of the panel, pressed for low­er­ing rates by at least 25 ba­sis points.

The cen­tral bank main­tained its neu­tral pol­icy stance but ac­knowl­edg­ing slug­gish eco­nomic ac­tiv­ity, low­ered its fis­cal 2018 pro­jec­tion for gross value added, a growth met­ric, to 6.7% from 7.3%.

“The im­ple­men­ta­tion of the GST so far also ap­pears to have had an ad­verse im­pact, ren- de­r­ing prospects for the man­u­fac­tur­ing sec­tor un­cer­tain in the short term. This may fur­ther de­lay the re­vival of in­vest­ment ac­tiv­ity, which is al­ready ham­pered by stressed bal­ance sheets of banks and cor­po­rates,” said the MPC state­ment.

In the last pol­icy meet­ing in Au­gust, the RBI slashed the repo rate by 25 ba­sis points (bps). How­ever, since then, in­fla­tion as mea­sured by the con­sumer price in­dex (CPI) has ac­cel­er­ated sharply. One ba­sis point is one­hun­dredth of a per­cent­age point.

Au­gust CPI in­fla­tion, the lat­est avail­able, quick­ened to 3.36% be­cause of higher food prices and has climbed by 190 ba­sis points in the last two months. Core in­fla­tion, which ex­cludes the volatile com­po­nent of food and fuel, has also shot up sharply.

The mone­tary pol­icy panel listed sev­eral up­side risks to in­fla­tion on Wed­nes­day such as farm loan waivers, states’ im­ple­men­ta­tion of pay com­mis­sion al­lowances, and price re­vi­sions fol­low­ing GST and ris­ing in­ter­na­tional crude prices.

“Tak­ing into ac­count these fac­tors, in­fla­tion is ex­pected to rise from its cur­rent level and range be­tween 4.2-4.6 per cent in the sec­ond half of this year, in­clud­ing the house rent al­lowance by the Cen­tre,” said the MPC.

“Although the do­mes­tic food price out­look re­mains largely sta­ble, gen­er­alised mo­men­tum is build­ing in prices of items ex­clud­ing food, es­pe­cially em­a­nat­ing from crude oil. The pos­si­bil­ity of fis­cal slip­pages may add to this mo­men­tum in the fu­ture. The MPC also ac­knowl­edged the like­li­hood of the out­put gap widen­ing, but re­quires more data to bet­ter as­cer­tain the tran­sient ver­sus sus­tained head­winds in the re­cent growth prints,” it added.

The cen­tral bank has a medium-term tar­get for CPI in­fla­tion at 4%.

On growth, the RBI re­it­er­ated need to re­vive slug­gish pri­vate sec­tor in­vest­ment in or­der to give a fil­lip to the econ­omy as well as im­prove de­mand for over­all credit. It listed sev­eral mea­sures to boost growth such as “a con­certed drive to close the se­vere in­fra­struc­ture gap; restart­ing stalled in­vest­ment projects, par­tic­u­larly in the pub­lic sec­tor; en­hanc­ing ease of do­ing busi­ness, in­clud­ing by fur­ther sim­pli­fi­ca­tion of the GST; and en­sur­ing faster roll-out of the af­ford­able hous­ing pro­gram with time-bound sin­glewin­dow clear­ances and ra­tio­nal­i­sa­tion of ex­ces­sively high stamp du­ties by states.”


Growth ex­pec­ta­tions: RBI main­tained its neu­tral pol­icy stance but ac­knowl­edg­ing slug­gish eco­nomic ac­tiv­ity, low­ered its fis­cal 2018 pro­jec­tion for gross value added, a growth met­ric, to 6.7% from 7.3%.

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