RBI holds repo rate on inflation concerns
MPC sees fiscal slippage, global financial instability heightening asset price volatility
As was widely expected, the sixmember monetary policy committee (MPC) on Wednesday voted 5:1 in favour of a status quo on the policy repo rate, citing various reasons, including the possibility of retail inflation edging up, risk of fiscal slippage, and oil prices going up.
The central bank nudged up its inflation projection to the 4.3-4.7 per cent range for the third and fourth quarters of FY18 against 4.24.6 per cent projected in the October bi-monthly policy. It, however, retained the gross value added (GVA) projection at 6.7 per cent.
Of the five bi-monthly monetary policies announced in this financial year so far, the RBI pared the repo rate — the interest rate at which banks borrow funds from the central bank to overcome shortterm liquidity mismatches — only once, from 6.25 per cent to 6 per cent in the August 2017 review.
The MPC also decided to persevere with the neutral stance and reiterated its commitment to keeping consumer price index (CPI) inflation at a target of 4 per cent while supporting growth.
Financial market players, however, seemed disappointed with the RBI’s decision. The equity market bellwether — the BSE Sensex — fell 205.26 points to 32,597.18 and the rupee weakened 13 paise to close at 64.5150 to the dollar.
“In arriving at this decision, the MPC took note of the upside pressures from food and fuel prices on evolving cost of living conditions and inflation expectations,” said RBI Governor Urjit Patel. “Our surveys indicate that corporates are also contending with rising input cost conditions and higher risks of pass through to retail prices in the near term.”
Patel further said: “In addition, the committee expressed concern about the implications for the inflation outlook of (a) possible fiscal slippage and (b) global financial instability heightening asset price volatility.”
However, the MPC also said it expected the usual seasonal moderation in the prices of vegetables and fruits and the lowering of tax rates by the GST Council to mitigate some of these pressures.
With the RBI keeping the repo rate unchanged at 6 per cent, banks are unlikely to tweak either their deposit or lending rates. The MPC pitched for reducing the cost of domestic borrowings through improved transmission by banks of past monetary policy changes on outstanding loans.
On the neutral monetary policy stance, Patel said this means that data flow in the coming months and quarters will determine what the RBI does regarding the policy.
“The neutral stance is there for the reason that all possibilities are on the table and we will look carefully at both the inflation and growth data that comes in the coming months...,” Patel said.
“...We did not consider shifting the stance because nothing between October to now was significant enough in terms of the macro outcomes to warrant that,” he explained.
Patel noted that the latest data on bank credit suggest that “we are already on the uptake in terms of credit growth.” Credit is “already flowing, more than what was the case in October. And as the economy picks up, the demand for credit should go up,” he added.
In its statement on development and regulatory policies, the RBI announced rationalisation of the merchant discount rate to give a further fillip to the acceptance of debit card payments across a wider network of merchants.
Further, the RBI permitted the overseas branches/subsidiaries of Indian banks to refinance external commercial borrowings (ECBs) of top-rated corporates as well as ‘Navaratna’ and ‘Maharatna’ public sector undertakings by raising fresh ECBs.
Jatinderbir Singh, Chairman, Indian Banks’ Association, said: “The policy is on the expected lines. Clearly, the inflation dynamics dominated the RBI’s decision to maintain the status quo. RBI’s retention of the GVA projection for the financial year and maintenance of its neutral stance, coupled with the imminent recapitalisation programme for public sector banks, will further help in improving the overall credit growth.”
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