RBI Monetary Policy Review: Central bank keeps key interest rate unchanged at 6% with neutral stance

Mumbai, Feb 7: The Reserve Bank of India (RBI) kept its key interest rate unchanged at 6 percent for the fourth time in succession at its final bi-monthly monetary policy review of the fiscal,  in view of an inflationary push by rising global crude oil prices.

Announcing the first monetary policy review after the Union Budget 2018-19 presented by Finance Minister Arun Jaitley last week, the RBI stated its decision to keep its repo, or short-term lending rate for commercial banks, unchanged is consistent with the neutral stance of the central bank aimed at achieving its median inflation target of 4 percent.

“Consequently, the reverse repo rate remains at 5.75 percent, and the marginal standing facility (MSF) rate and the Bank Rate at 6.25 percent,” an RBI statement asserted after the meeting of the six-member Monetary Policy Committee (MPC).

After the release of the statement, while addressing media RBI Governor Urjit Patel said “We expect headline inflation to be at 5.1 percent in the fourth quarter (January-March), including the impact of HRA (house rent allowance) to central employees, up from the 4.6 percent in Q3”.

The continuing hike in food and fuel prices pushed India’s annual retail inflation rate over the five percent mark in December 2017 to 5.21 percent, from 4.88 percent in November 2017.

Elaborating on the upside risks to inflation, the RBI enlisted the various factors.

First, international crude oil prices have firmed up sharply since August 2017, while non-oil industrial raw material prices have also witnessed a global uptick,” the MPC statement said.

Second, the staggered impact of HRA increases by various state governments may push up
headline inflation further in 2018-19, and potentially induce second-round effects.

Third, the Union Budget 2018-19 has proposed revised guidelines for arriving at the minimum support prices (MSPs) for kharif crops Fourth, the Budget has also proposed an increase in customs duty on a number of items.”

Fourth, fiscal slippage as indicated in the Budget could impinge on the inflation outlook. Sixth, the confluence of domestic fiscal developments and normalisation of monetary policy by major advanced economies could further adversely impact financing conditions and undermine the confidence of external investors,” it added.

Five members of the MPC, including the three external ones and the Governor, voted in favour of the decision, while Executive Director Michael Patra voted for a hike in the policy rate by 25 basis points.

Noting the need for “vigilance” on inflation, the central bank also cut its earlier Gross Value Added (GVA), which excludes taxes but includes subsidies, the growth forecast for the current fiscal to 6.6 percent, from 6.7 percent.

RBI governor welcomed Budget 2018-19’s focus on the rural and infrastructure sectors as it would back rural incomes and investment, and in turn provide a further push to aggregate demand.

“On the downside, the deterioration in public finances risks crowding out of private financing and investment. The Committee is 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 apex bank stated.

WeForNews 

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