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RBI keeps policy rate unchanged; flags inflation, deficit

Thursday, February 08, 2018

The Reserve Bank yesterday kept interest rates unchanged for the third time in a row saying that higher government spending would accelerate inflation, and warned of risks from wider fiscal deficit.

The 6-member Monetary Policy Committee (MPC), headed by RBI Governor Urjit Patel, retained the repurchase or repo rate at 6% and reverse repo rate at 5.75%. It kept a neutral stance at its 6th and the last bi- monthly monetary policy review of the current fiscal, 2017-18. Inflation, which surged to a 17-month high of 5.21% in December, is likely to accelerate further after Budget for 2018-19 widened fiscal deficit target so as to finance higher rural spend and mega healthcare plan.

"We are still awaiting some of specifics on that in terms of costing it... We have said that there could be impact but we have not said how much," Patel said. "There is not enough information at the moment about what the costing would be."

The Union Budget 2018-19 would stoke demand but worsening public finances may crowd out private funding and investment, RBI said in a statement. RBI upped its inflation forecast to 5.1% for the current fourth quarter of the 2017-18 fiscal ending March 31. It expects inflation to firm up further to 5.1-5.6% in first half of the next fiscal, before cooling down to 4.5-4.6% in the second half.

There is "need for vigilance around the evolving inflation scenario in the coming months," it said. "Fiscal slippage as indicated in the Union Budget could impinge on the inflation outlook." Upside risks to inflation include oil prices and the staggered impact of the implementation of HRA by various state governments.

Patel and four other MPC members voted for status quo on the interest rate while one member, Michael Patra favoured a 25 basis point rate hike.

Stating that it stays committed to keep headline inflation close to 4%, RBI put the Gross Value Added (GVA) -- a key measure of growth -- at 7.2% for the next fiscal year with risks evenly balanced.

Photocaption: RBI Governor Urjit Patel addresses a press conference to announce the RBI's monetary policy at its headquarters in Mumbai yesterday.

RBI lowers economic forecast to 6.6% for FY18
The Reserve Bank yesterday lowered the economic growth projection for 2017-18 to 6.6%, but said that it will accelerate to 7.2% in the next financial year as the roll-out of GST stabilises and credit offtake improves. The statement also said that recapitalisation of public sector banks along with resolution of stressed assets under the Insolvency and Bankruptcy Code (IBC) will create demand for fresh investments. "GVA (Gross Value Added) growth for 2017-18 is projected at 6.6%," it said.

RBI to link base rate with MCLR
 The Reserve Bank said yesterday that it will link the base rate with the MCLR from April 1 to ensure expeditious transmission of its policy rate to borrowers. RBI introduced the Marginal Cost of Funds based Lending Rates (MCLR) system with effect from April 1, 2016 on account of the limitations of the Base Rate regime. "With the introduction of the MCLR system, it was expected that the existing Base Rate linked credit exposures shall also migrate to MCLR system," RBI said in the statement on Developmental and Regulatory Policies.

RBI sees inflation firming up at 5.1% in March qtr
The Reserve Bank is expecting retail inflation to rise to 5.1% in the last quarter of the ongoing fiscal due to rising crude oil prices and hike in salary components of government employees. The central bank has also projected inflation to be in the range of 5.1-5.6% in the first half of 2018-19. Meanwhile, the RBI has kept the key repo rate, at which it lends to banks, unchanged at 6%.

The RBI monetary policy announcement is pragmatic and balanced. The RBI inflation outlook suggests moderation in second half of FY2019 that will have a positive impact on bond market. Apart from the status-quo in rates that was widely anticipated, the forbearance allowed to MSME borrowers, broadening the definition of priority sector lending and simplification of repo directions among others are all positive steps towards a stable macro environment.”
Rajnish Kumar,
Chairman, SBI

The Policy rate has taken ground realities into consideration. The upward revision to CPI inflation forecast for Q4 FY18 to the 5.1% to 5.6% range shows the concern by MPC on the inflation outlook. However, this was on expected lines in the wake of rising international oil prices and impending MSP hikes. The forbearance given to MSMEs below an exposure level of Rs.25 crore is a welcome development. This supplements the favorable tax treatment accorded to this segment in the Union Budget. The forbearance on NPAs will go a long way towards improving their cash flows and will in turn help banks in managing delinquency levels.  
Dinabandhu Mohapatra,
MD & CEO, Bank of India

Monetary policy status quo is a reflection of RBI’s caution amidst recent global developments of higher crude oil prices and financial market gyrations. While RBI’s policy stance could remain unchanged in the near future, fiscal policy has taken the onus on curbing inflationary pressures via proactive management of the food economy and some rationalization in fuel taxes, if need be. Going forward, the rollout of the FY19 Union Budget will help consolidate benefits of past economic reforms and at the same time ensure that the sustainable growth dividend is underscored by equanimity in distribution
Rana Kapoor,
MD & CEO, YES Bank

“On the expected line, the Reserve Bank of India has kept its policy rate unchanged. Indeed, the inflation projection for the first half of the fiscal year 2019 has been increased to 5.1%-5.6% but for the second half, it has been kept lower at 4.5%-4.6% on account of a strong favorable base effect. By keeping its stance unchanged – neutral – it has sent a positive signal to the market. While MSMEs with an exposure up to Rs. 25 crore will have extra time to repay bank loans, banks have also been allowed to treat all MSME loans as priority sector loans without any limit on their exposure. This will encourage banks to lend to this sector which is an engine for economic growth.”
Chandra Shekhar Ghosh,
MD, Bandhan Bank

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