05 Oct 2017

Banking Awareness 5th Oct Update: RBI keeps key policy rate unchanged

RBI holds rate on inflation risks; Warns on stimulus; Inflation projection revised upward, growth lowered

The monetary policy committee (MPC) of Reserve Bank of India decided to hold the key policy rate unchanged at 6% as it sees risks to inflation.

However, it maintained the neutral stance of the policy while reiterating that the MPC remains committed to keep headline inflation close to 4% on durable basis.

“Retail inflation measured by year-on-year change in the consumer price index (CPI) edged up sequentially in July and August to reach a five month high, due entirely to a sharp pick up in momentum as the favourable base effect tapered off in July and disappeared in August,” RBI said in the policy statement.

While five members of the MPC are in favour of the decision, one member – Ravindra Dholakia voted for a 25 bps cut in policy rate.

RBI said inflation is expected to rise from its current level and range between 4.2-4.6% in the second half of this year. The MPC has observed that headline inflation rose by two percentage points since the August policy review.

“As noted in August policy, there are factors that continue to impart upside risks to this baseline trajectory,” the central bank said.

Regarding growth, RBI said the loss of momentum in Q1 of 2017-18 and the first advance estimates of kharif foodgrains production are early setbacks that impart a downside to the outlook. The central bank noted goods and service tax implementation seems to have an adverse impact as it made prospects of the manufacturing sector uncertain which may further delay investment revival.

As result, RBI lowered the projection of real GVA growth for 2017-18 has been to 6.7% from the August 2017 projection of 7.3%.

The central bank has warned over a possible fiscal stimulus — as mooted by industry to boost growth — as it said such a step could lead to inflation surging by 50 bps.

“Given the general Government fiscal deficit, in other words, of the state and central government’s account combined, even that is in the region of 6% of GDP. Our national fiscal stance can hardly be described as tight. In other words, we have to be very cautious about this fiscal actions,” RBI governor Urjit Patel said.

 

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