Reserve Bank keeps interest rates unchanged, lowers inflation projection to 2.7-3.2% for H2 FY19 on normal monsoon

The Reserve Bank of India (RBI) on Wednesday left the repo rate unchanged while maintaining the stance of ‘calibrated tightening’ of policy. The key rate remains unchanged at 6.5 percent. This is for the second time in a row that the central bank did not tinker with the interest rate. “The decision of the Monetary Policy Committee is consistent with the stance of calibrated tightening of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 percent within a band of +/-2 percent, while supporting growth,” RBI said. The RBI also retained the GDP growth projection for FY19 at 7.4 percent. For the first half of 2019-20, the GDP is been projected at 7.5 percent. The central bank said that the GDP growth in April-September of current fiscal has been broadly in line with RBI projection of 7.4 per cent for full fiscal. Stating that acceleration in investment activity bodes well for the medium-term growth potential of the economy, the RBI called for strengthening of macroeconomic fundamentals. [caption id=“attachment_4499583” align=“alignleft” width=“380”] Representational image. Reuters.[/caption] RBI said inflation in the second half of the current fiscal is projected at is projected at 2.7-3.2 percent, citing normal monsoon and moderate food prices. While the decision on keeping the policy rate unchanged was unanimous, Ravindra H Dholakia voted to change the stance to neutral. The broad-based weakening of food prices imparts downward bias to the headline inflation trajectory going forward, the RBI said in its fifth bi-monthly monetary policy announced here. In its previous policy review in October, the apex bank had projected the retail inflation to be around 3.9-4.5 percent in the October-March period of 2018-19. In contrast to the food prices, there has been a broad-based increase in inflation in non-food groups. International crude oil prices have declined sharply since the last policy and the price of Indian crude basket collapsed to below $60 a barrel by end-November after touching $85 a barrel in early October. “Taking all these factors into consideration and assuming a normal monsoon in 2019, inflation is projected at 2.7-3.2 percent in H2 FY2018-19 and 3.8-4.2 percent in H1 FY2019-20, with risks tilted to the upside,” the RBI said. It said the projected inflation path remains unchanged after adjusting for the HRA impact of central government employees as this impact dissipates completely from December 2018 onwards. Although recent food inflation prints have surprised on the downside and prices of petroleum products have softened considerably, it is important to monitor their evolution closely and allow heightened short-term uncertainties to be resolved by incoming data, it added." With inputs from PTI