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RBI leaves key rate unchanged; retains growth forecast at 6.7%

Thursday, December 07, 2017

Deterred by inflationary concerns, the Reserve Bank yesterday kept the policy rate unchanged leaving little scope for banks to lower interest rates on housing and auto loans. It raised the inflation estimate to 4.3-4.7%, from the earlier projection of 4.2-4.6%, for the second half of the current financial year.

However it retained the growth forecast at 6.7% for 2017-18 even through the gross value added (GVA) in the second quarter rose to 6.3%. The 6-member Monetary Policy Committee (MPC), headed by Reserve Bank of India (RBI) Governor Urjit Patel, in its 5th bi-monthly review in the current fiscal, kept repo rate unchanged at 6% and reverse repo at 5.75%.

It said the reason for the decision was "achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth". RBI factored in the Housing Rent Allowance (HRA) effect of up to 35 basis points, with risks evenly balanced, following the implementation of the 7th Pay Commission recommendations for central government employees.

The impact of HRA is expected to peak in December. However, the staggered impact of HRA increases by various state governments may push up housing inflation further in 2018, it said. Expecting price situation to harden, it said: "The moderation in inflation excluding food and fuel observed in Q1 of 2017-18 has, by and large, reversed. There is a risk that this upward trajectory may continue in the near-term."

The recent rise in international crude oil prices may sustain, especially on account of the OPEC’s decision to maintain production cuts through next year, it said.

RBI's policy status quo leaves India Inc cold
India Inc yesterday expressed disappointment over RBI's decision to hold fire, saying there is a need to revive domestic demand and encourage investment through lower cost of capital to crank up growth.

"We are hopeful that going forward the RBI would shift its policy stance from neutral to accommodative and effect a cut in interest rates to revive domestic demand, which would provide a fillip to broad-based investment activity that has yet to take off in a big way," said CII Director General Chandrajit Banerjee.

He observed that a reduction in interest rates would give the necessary signal that fiscal and monetary policies are working in tandem to give a boost to growth.

RBI warns of fiscal slippage, inflation
Sounding a note of caution, the Reserve Bank yesterday said reduction in GST rates, partial roll- back of duties on petroleum products and farm loan waivers by some states may lead to "fiscal slippage" fuelling inflation.

Releasing the Fifth Bi-Monthly Monetary Policy statement for 2017-18, it also raised the inflation forecast marginally to 4.3-4.7% for the second half of the fiscal from earlier estimate of 4.2-4.6%.

"...Implementation of farm loan waivers by select states, partial roll back of excise duty and VAT in the case of petroleum products, and decrease in revenue on account of reduction in GST rates for several goods and services may result in fiscal slippage with attendant implications for inflation," it said.

RBI expects retail inflation to range 4.3-4.7% in H2 FY'18
The RBI said yesterday that it expects retail inflation to be in the 4.3-4.7% range during the second half of the current fiscal, marginally higher than projected earlier, on account of global crude oil prices and implementation of the 7th Pay Commission recommendations. It said the headline inflation outcomes have evolved broadly in line with projections.

"Going forward, the inflation path will be influenced by several factors," it said in the Fifth Bi-Monthly Monetary Policy Review unveiled yesterday.
"On the whole, inflation is estimated in the range 4.3- 4.7% in third quarter and fourth quarter of this year, including the HRA effect of up to 35 basis points (0.35%), with risks evenly balanced," the Reserve Bank said.

The policy assessment is fairly balanced and pragmatic with inflation and growth both expected to show an uptick in next 2 quarters. The decision in allowing subsidiaries of Indian banks abroad to refinance AAA rated corporates will provide a fair and just opportunity to Indian banks to book and retain good quality assets.
—Rajnish Kumar, Chairman, SBI

Considering the upward trend in inflation, rising crude and a possible reversal of monetary accommodation by major Central Banks, the status quo in policy rates was widely anticipated. For the banking sector as a whole, credit growth is slightly higher than deposit growth, signaling an end to easy liquidity conditions. Taking a cue, some banks increased the rates on wholesale deposits. Both domestic and global growth is on a rising trend. However, higher growth overseas also carries the risks of upward movements in commodity prices, not really good news for a major oil importer like India.
—Dinabandhu Mohapatra, MD & CEO, Bank of India

The tone of the policy is noticeably cautious on prices and positive on growth. It is also to be noted that the future policy actions will largely depend on data facts. Augmenting the increase in Digital payments, the introduction of differentiated Merchant Discount Rate and a cap on the absolute amount of MDR for Debit card transactions is expected to increase acceptance of Debit card usage and will also bring down the cost of transactions for small merchants.
—Ashwani Kumar, CMD, Dena Bank

The MPC has retained its growth projections with risks evenly balanced and slightly raised its inflation projections.  The tone remains distinctly cautious on prices and positive on growth. In view of short term uncertainties on price trajectory, further policy action will largely remain data dependent. We however expect a prolonged paused on rate action for now.
—Rajni Thakur, Economist, RBL Bank

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