RBI keeps policy rate unchanged over inflation, fiscal deficit concerns


The Reserve Bank of India has kept the key policy rate unchanged at six per cent for the third consecutive time, citing firming inflation and fiscal deficit as the main concerns

The Reserve Bank of India (RBI), on February 7, 2018, opted for the widely expected status quo in key rates, citing inflation concerns and flagged risks from wider fiscal deficit. The repo rate, at which the central bank lends short-term money, will continue to stay at six per cent. The reverse repo rate, at which it borrows from banks and absorbs excess liquidity, will remain at 5.75 per cent.

The resolution of the six-member Monetary Policy Committee (MPC) said, “The inflation outlook is clouded by several uncertainties on the upside,” flagging risks from the 7th pay panel implementation in states, high oil prices, hike in customs duties and fiscal slippage to 3.5 per cent in 2017-18 and a higher target for 2018-19. “Fiscal slippage as indicated in the Union Budget, could impinge on the inflation outlook. Apart from the direct impact on inflation, fiscal slippage has broader macro-financial implications, notably on economy-wide costs of borrowing, which have already started to rise. This may feed into inflation,” it warned.

See also: RBI keeps key interest rates unchanged

Deterioration in public finances risks crowding out of private financing and investment, it said, adding that the nascent recovery needs to be carefully nurtured. The RBI also upped its inflation forecast to 5.1 per cent for the ongoing fourth quarter of 2017-18 and expects it to firm up further to 5.1-5.6 per cent in first half of the next fiscal, before cooling down to 4.5-4.6 per cent in the second half. Factors which can fuel price rise include a proposed increase in minimum support prices for grains, a rally in oil prices and the government deviating from the fiscal consolidation roadmap to target a wider 3.2 per cent deficit in 2018-19.

On the positive side, MPC said there are mitigating factors like subdued capacity utilisation and moderate growth in rural wage, while welcoming the focus of Union Budget 2018 -19 on rural and infrastructure spending. The RBI also lowered its growth target to 6.6 per cent for the current fiscal ending on March 31, from 6.7 per cent earlier, but said that it will accelerate to 7.2 per cent in 2018-19. The government is expecting a 7-7.5 per cent growth in 2018-19.

On the economic growth front, there has been some improvement as the effects of the twin blows of demonetisation and GST implementation are waning. The RBI had switched its stance to neutral, from being accommodative in February 2017, as it saw a rise in inflation. It had last cut the repo rate by 0.25 per cent in the August 2017 monetary policy review.

Anuj Puri, chairman–ANAROCK Property Consultants, explains that “The Reserve Bank of India’s stance of keeping the repo rate unchanged at six per cent is exactly along the lines of our expectations. Considering that the inflation has inched up (Dec-17 CPI at 5.21 per cent, up from 3.58 per cent in Oct-17 and well-above the target of four per cent), crude oil prices are rising in the international market and the government plans to increase the crop support price, maintaining the lending rates unchanged is justified. We believe that the interest rates will soon start inching upwards, which is already being factored into the rising bond yields for the past few months. The real estate sector can and should look at the long-term economic prospects and implications on which the monetary policy decisions are based, as these will dictate the growth trajectory for the sector.”

 

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