RBI keeps key interest rate unchanged at 6% on inflationary concerns

Mumbai: The Reserve Bank on Wednesday 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 6 percent. The reverse repo, rate at which it borrows from banks and absorbs excess liquidity, will remain at 5.75 percent.

The resolution of the 6-member Monetary Policy Committee (MPC) said "the inflation outlook is clouded by several uncertainties on the upside", flagging risks from 7th pay panel implementation in states, high oil prices, hike in customs duties and fiscal slippage to 3.5 percent 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.

Deterioration in public finances risks crowding out of private financing and investment, it said, adding that the nascent recovery needs to be carefully nurtured.

Representational image. AFP.

Representational image. AFP.

RBI said however that it is too early to assess the impact of the minimum support prices hike in foodgrains and the impact on inflation.

RBI also upped its inflation forecast to 5.1 percent for the ongoing fourth quarter of 2017-18 and expects it to firm up further to 5.1-5.6 percent in first half of the next fiscal, before cooling down to 4.5-4.6 percent in the second half.

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.

RBI also lowered its growth target to 6.6 percent for the current fiscal ending on March 31, from 6.7 percent earlier, but said that it will accelerate to 7.2 percent in 2018-19.

Five members of the panel, including RBI Governor, voted for a status quo while executive director Michael Patra was the lone member who wanted the key rate to be hiked.

On volatility in global financial markets, RBI said it is due to uncertainty over the pace of normalisation of the US Fed monetary policy.

A majority of watchers were expecting the MPC to go for a status quo in rates with a hawkish commentary on inflation concerns.

Inflation accelerated to 5.2 percent in December, from the 5 percent level in the previous month. The RBI is bound to keep the headline price rise number at 4 percent with a two percentage point leeway on either side.

At the last policy review, it had raised the inflation forecast to 4.3-4.7 percent for the second half of the current fiscal.

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 percent deficit 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 government is expecting a 7-7.5 percent growth in 2018-19.

The RBI had switched stance to neutral from being accommodative in February last year as it saw rise in inflation. It had last cut the repo rate by 0.25 percent in the August 2017 monetary policy review.

Updated Date: Feb 07, 2018 15:34 PM

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