The Reserve Bank of India (RBI) on Wednesday 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 6.00%.
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, rendering 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 one-hundredth 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 single-window clearances and rationalization of excessively high stamp duties by states.”