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RBI keeps repo at 7-year low of 6%; cites retail inflation, HRA effect of up to 35 bps among reasons for status quo

The RBI is holding its fifth bimonthly monetary policy review meeting on 5-6 December which may not cut interest rate

FP Staff December 06, 2017 15:22:34 IST
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RBI keeps repo at 7-year low of 6%; cites retail inflation, HRA effect of up to 35 bps among reasons for status quo

Highlights

15:47 (ist)

Highlights

At ​today's Monetary Policy Committee review meet, the Reserve Bank of India decided to stick to a 6 percent repo rate. The review was mainly in line with several expert opinions that had backed  a status quo. GDP number in October came in at 6.3 percent, as against 5.7 percent that came in June.

Inflation also rose to 3.58 percent in October compared with 3.28 percent earlier. The monetary policy committee took a cautious note of the macroeconomic indicators. Out of six members, one memebr voted in favour of a 25 basis points rate cut. 

Despite some improvement, construction sector growth remained tepid due to transitory effects of the RERA and GST implementation. Growth in the trade, hotels, transport and communication sub-group remained resilient, in spite of some slowdown in growth in Q2 as compared with the previous quarter.

On the expenditure side, the growth of gross fixed capital formation improved for the second successive quarter. However, growth in private final consumption expenditure – the mainstay of aggregate demand – slowed to an eight-quarter low in Q2.

The RBI said: Dr Chetan Ghate, Dr Pami Dua, Dr Michael Debabrata Patra, Dr Viral V Acharya and Dr Urjit R. Patel were in favour of the monetary policy decision, while Dr Ravindra H Dholakia voted for a policy rate reduction of 25 basis points. The minutes of the MPC’s meeting will be published by December 20, 2017.

The next meeting of the MPC is scheduled on February 6 and 7, 2018.

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Dec 06, 2017 - 15:47 (IST)

Highlights

At ​today's Monetary Policy Committee review meet, the Reserve Bank of India decided to stick to a 6 percent repo rate. The review was mainly in line with several expert opinions that had backed  a status quo. GDP number in October came in at 6.3 percent, as against 5.7 percent that came in June.

Inflation also rose to 3.58 percent in October compared with 3.28 percent earlier. The monetary policy committee took a cautious note of the macroeconomic indicators. Out of six members, one memebr voted in favour of a 25 basis points rate cut. 

Despite some improvement, construction sector growth remained tepid due to transitory effects of the RERA and GST implementation. Growth in the trade, hotels, transport and communication sub-group remained resilient, in spite of some slowdown in growth in Q2 as compared with the previous quarter.

On the expenditure side, the growth of gross fixed capital formation improved for the second successive quarter. However, growth in private final consumption expenditure – the mainstay of aggregate demand – slowed to an eight-quarter low in Q2.

The RBI said: Dr Chetan Ghate, Dr Pami Dua, Dr Michael Debabrata Patra, Dr Viral V Acharya and Dr Urjit R. Patel were in favour of the monetary policy decision, while Dr Ravindra H Dholakia voted for a policy rate reduction of 25 basis points. The minutes of the MPC’s meeting will be published by December 20, 2017.

The next meeting of the MPC is scheduled on February 6 and 7, 2018.

Dec 06, 2017 - 14:58 (IST)

Reforms will help, says RBI governor Urjit Patel
 

Dec 06, 2017 - 15:32 (IST)

Repo rate unchnaged on expected lines

RBI’s decision to maintain status quo on policy repo rate and neutral stance is along the expected lines. 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

Dec 06, 2017 - 15:22 (IST)

A history of rate cuts

Dec 06, 2017 - 15:19 (IST)

RBI to be on 'pause' mode

“It is unlikely that the RBI will move in the February policy too, given the inflation trajectory which is likely to peak in June 2018. Further, global policy rate cycle and commodity prices along with consolidated fiscal position will keep the RBI cautious. However, incoming data versus the RBI’s projections will remain key.

The tone of the policy does not indicate much room for any rate cuts. We maintain our call that the RBI will be on a pause in the near term. Chances of any rate hikes will be contingent on durability of inflation remaining above the RBI’s comfort zone."

Suvodeep Rakshit, senior economist, Kotak Institutional Equities, Mumbai

Dec 06, 2017 - 15:17 (IST)

'Too early to predict RBI policy in February'
 

“All indicators such as inflation, oil and commodity prices, and global cues have been in one direction since the last policy meet. They don’t seem to favour a rate cut going forward.
  
“I don’t see a reason why RBI would cut rates in the next meeting in February unless something substantial changes..”
“It’s too early to predict beyond the February policy meet, we’ll have to see how things shape up.”

Sudhakar Pattabiraman, Head, Research Operations, Marketsmith -- part of William O'Neil, Bangalore

Dec 06, 2017 - 15:14 (IST)

In digital push, debit card charges to be rationalised


The RBI said it had decided to rationalise charges on debit card transactions to give a further fillip to digital payments. 

Dec 06, 2017 - 15:12 (IST)

Rate cut in February unlikely, says Sunil Sinha, India Ratings

”A rate cut in February is unlikely given that the upside inflation risks that the central bank was expecting are still panning out. Given where the vegetable prices and oil prices have stood at recently, CPI and WPI data is expected to come in higher than October numbers. The tone of the policy statement in my view is cautious. While it highlights positives on the growth front, issues on global development and outlook on inflation put the RBI in a difficult situation.”

Sunil Sinha, Director, Principal Economist, India Ratings, Delhi

Dec 06, 2017 - 15:10 (IST)

RBI repo rate at a glance

Dec 06, 2017 - 15:09 (IST)

Currency in circulation increased by Rs 73,600 crore in Q3

Surplus liquidity in the system has continued to decline during October and November.

Currency in circulation increased by Rs 736 billion in Q3 (up to December 1, 2017) over end-September on festival demand.

The Reserve Bank managed surplus liquidity through the conduct of regular variable rate reverse repo auctions of various tenors, ranging from overnight to 28 days. 

The Reserve Bank of India's Monetary Policy Committee slated to announce the interest rate decision in a short while after its two-day meeting to review the monetary policy for 2017-18. The bimonthly meeting has been on from Tuesday.

RBI keeps repo at 7year low of 6 cites retail inflation HRA effect of up to 35 bps among reasons for status quo

There is wide expectation that the committee will not cut repo rate -- the rate at which the central bank lends to banks, which is its policy rate -- due to concerns over a likely rise in retail inflation. Moreover, there has been a marginal jump is GDP growth in the second quarter.

In October, consumer price index-based inflation hit a seven month high of 3.58 percent while during July-September the country's GDP grew 6.3 percent as against 5.7 percent in the previous quarter. Economists feel the uptick in growth will give enough elbow room for the committee to hold the rate this time round.

There are also concerns that inflation may quicken further, given the unprecedented winter rains that is likely to impact the production of vegetables and food grain negatively, eventually pushing up the food inflation. Also the international crude oil prices are on the upswing, which is also likely to boost commodity prices.

Moreover, the impact of the goods and services tax (GST) on the prices and the seventh pay commission award on the inflation are still unfolding. The RBI may want to wait and watch a little bit more before taking any decision on the rate.

A survey conducted by Bloomberg showed 42 of the 48 economists polled said RBI will not cut repo rate. Again, all but two of 54 analysts in a Reuters poll said the repo rate would be left at 6 percent, the lowest since November 2010.

However, government officials and ministers are pushing for a rate cut.

“The central point is why the MPC is not cutting down the interest rates to reduce the cost of capital. MPC’s reluctance to do so means that no businesses can survive as the cost of working capital is high and no entrepreneur will be willing to hire new people,” Surjit Bhalla, a member of the Prime Minister's Economic Advisory Council, told Firstpost recently.

The economist was of the opinion that the MPC should not be carried away by the 6.3 percent GDP growth recorded in July-September.

A status quo on the interest rate is likely to elicit sharp reactions from the government. But the MPC has not many options.

Over to the MPC.

Updated Date:

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