The Reserve Bank of India (RBI) in its third bi-monthly policy of the current fiscal, on August 1, 2018, raised the benchmark repo, or the short-term rate at which it lends to other banks, by 0.25 per cent, to 6.5 per cent. The six-member Monetary Policy Committee (MPC), headed by RBI governor Urjit Patel, kept its stance at neutral. The reverse repo rate, at which it borrows from banks, was also raised by similar proportion to 6.25 per cent. The marginal standing facility (MSF) rate and the Bank Rate, were also raised to 6.75 per cent. Anticipating firming of interest rate, the country’s largest lender, SBI, raised fixed deposit rate by up to 0.1 per cent. Other banks are also likely to firm up lending rates, making loans costlier for borrowers.
The RBI cited various concerns to inflation like volatile crude prices, uncertainty in the global financial market, hardening of input prices for corporates, uneven distribution of rainfall, fiscal slippages and rise in MSP of foodgrains. For July-September, it pegged CPI-based retail inflation at 4.2 per cent, which it saw firming up to 4.8 per cent in the second half of the current fiscal. “The inflation outlook is likely to be shaped by several factors. First, the central government has decided to fix the minimum support prices (MSPs) of at least 150 per cent of the cost of production for all kharif crops, for the sowing season of 2018-19. This increase in MSPs for kharif crops, which is much larger than the average increase seen in the past few years, will have a direct impact on food inflation and second-round effects on headline inflation,” the RBI said, in its bi-monthly policy review.
“Second, the overall performance of the monsoon, so far, augurs well for food inflation in the medium-term. Third, crude oil prices have moderated slightly but remain at elevated levels. Fourth, the central government has reduced the Goods and Services Tax (GST) rates on several goods and services,” the RBI said. This will have some direct moderating impact on inflation, provided there is a pass-through of reduced GST rates to retail consumers, it added. The projected inflation rate is above its targeted comfort level of four per cent.
The RBI also kept the GDP forecast for the current fiscal unchanged at 7.4 per cent and saw it at 7.5-7.6 per cent in the second half of the current fiscal. “Robust corporate earnings, especially of fast moving consumer goods (FMCG) companies, also reflect buoyant rural demand,” the central bank said, adding that investment activity remains firm, even as there has been some tightening of financing conditions in the recent period.
The monetary policy statement further said that increased FDI flows in recent months and continued buoyant domestic capital market conditions, bode well for investment activity. The central bank said that activity in the manufacturing sector is expected to remain robust in Q2, although there may be some moderation in pace. Rising trade tensions may, however, have an adverse impact on India’s exports, it said.