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RBI keeps repo rate unchanged at 6 percent, raises inflation forecast

By Deepika
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    The Reserve Bank kept the key policy rate unchanged at 6 per cent for the third consecutive time in view of firming inflation.

    Image for representation only

    The panel voted 5 to 1 in favour of a status quo on rates. It also flagged off upward risks to inflation and lowered the growth projections for this year and next year marginally.

    The Monetary Policy Committee (MPC), headed by RBI Governor Urjit Patel had last reduced the benchmark lending rate by 0.25 percentage points to 6 per cent last August, bringing it to a 6-year low.

    The repo rate remains 6 percent, the lowest since November 2010, and the reverse repo rate continues to be 5.75 percent. The repo rate is the interest rate at which the central bank lends to banks, and the reverse repo rate is the rate at which it borrows from banks.

    The RBI, in its policy statement, has lowered economic growth projection to 6.6 per cent for 2017-18, from 6.7 per cent. It has estimated 7.2 per cent growth in the next fiscal.

    The central bank has predicted inflation at 5.1% for January-March 2018. In its previous meeting, it had slightly raised its forecast for inflation during October 2017-March 2018 to 4.3-4.7%. But then, in December 2017, retail inflation in India rose to a 17-month high of 5.21%, which was above the RBI's target of 4%.

    After the government raised its fiscal deficit target for 2018-'19 on February 1, inflation is expected to accelerate further, as a higher fiscal deficit means more public spending. The central bank raises interest rates to keep inflation in check.

    The central bank said GST was stabilising, and tha teconomic activity was picking up adding that there are early signs of investment revival. It also said that the exact magnitude of MSP rise on inflation cannot be fully assessed at this stage.

    The RBI attributed volatility in financial markets to uncertainty over the pace of normalisation of the US Fed monetary policy.

    Experts, in a survey conducted earlier, expected the RBI to keep rates unchanged. Crude oil prices have already touched $70 per barrel, bond yields are rising globally and stock markets are now skittish. Banks, led by State Bank of India, have already raised bulk deposit rates by up to 140 basis points.

    A Reuters poll showed 58 of 60 economists expect the repo rate to be kept at 6.00 per cent, the lowest since November 2010, and the reverse repo rate at 5.75 per cent. The other two predicted a 25 basis points hike.

    In its December review, the MPC had kept the benchmark interest rate unchanged on concerns of a possible price rise but had left the door ajar for a rate cut in future.

    Retail inflation crossed the RBI's comfort level and rose to 5.21 per cent in December on increase in prices of food items. The retail inflation, based on Consumer Price Index CPI), was 4.88 per cent in November. In December 2015, it was 3.41 per cent.

    The Reserve Bank of India had reduced the benchmark lending rate by 0.25 percentage points to 6 per cent in August, bringing it to a 6-year low.

    Bankers and experts are of the view that for the third time in a row, RBI may key repo-rate or short term lending rate unchanged as inflation trajectory is likely to remain upward at a time when crude oil prices in international market has started firming up and government plans to raise crop support price.

    Also, pick up in economic activity in the second half of the current financial year, ending March 31, will reduce pressure on RBI to go in for a rate cut to boost growth.

    Experts said that while the main concern for the central bank will be the rising inflation trajectory, the MPC will also factor in the Union Budget 2018-19 presented by Finance Minister Arun Jaitley to Parliament earlier this month.

    RBI has been asked by the government to target inflation at 4 per cent, plus or minus 2 per cent, and its rise beyond the comfort zone will put pressure on the central bank not cut interest rate (repo rate).

    After the government presented the pre-budget Economic Survey to Parliament, Chief Economic Adviser Arvind Subramanian too had indicated that the scope for RBI to lower interest rate may be limited with growth picking up and inflation hardening.

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