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RBI raises inflation forecast, leaves interest rate unchanged

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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 the slowdown in economic growth had bottomed out.

The decision was in line with market expectations. The repurchase rate—the rate at which the central bank 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.

The policy supports the expectation that interest rates will remain unchanged for a prolonged period 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 as well, said Gaurav Kapur, chief economist at IndusInd Bank.

“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 on to rates, unless the Union budget turns out to be populist and there is indication of significant fiscal slippage.” said Kapur.

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 index-based (CPI-based) inflation target of 4%.

The panel noted that there were several factors that threatened to push up inflation in the near term such as rising food and fuel prices, increase in input costs and farm loan waivers in some states. It also highlighted the partial rollback 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 up inflation.

At the end of October, the centre’s fiscal deficit had hit 96.1% of the budget estimate for this financial year. RBI had maintained status quo on rates in the previous meeting in October as well. Since then, CPI inflation accelerated to 3.58% in October, the fastest pace in seven months, on 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 capital markets, improvement in the ease of doing business rankings, large distressed borrowers being referred for bankruptcy proceedings and the government’s Rs2.11 trillion bank recapitalization programme. It noted that these could get a further shot in the arm if banks passed on earlier rate changes by the central bank to lending rates on outstanding loans.

RBI reiterated that it was committed to keep headline inflation close to 4% on a durable basis.

“We have a neutral stance, which means that depending on the data flow in coming months and quarters we’’l 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 at both the inflation data and the growth data that comes in the coming months,” said RBI governor Urjit Patel.

Source livemint

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