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RBI Monetary Policy: MPC Holds Rates, Maintains Neutral Stance

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  • Repo rate unchanged at 6 percent

  • MPC maintains neutral stance on policy

  • Inflation forecast adjusted upwards by 10 bps to 4.3-4.7 percent in H2FY18

  • MPC maintains 6.7 percent GVA growth forecast for FY17

The monetary policy committee today voted to keep interest rates unchanged, but maintained a neutral stance allowing it to adjust rates in both directions if needed. The decision was in line with market expectations. A Bloomberg News poll of 46 economists had shown that a majority expected rates to remain unchanged.

Following today’s review, the benchmark repo rate remains at 6 percent. The reverse repo rate is at 5.75 percent. The decision was taken by 5-1 vote, with Ravindra Dholakia voting for a 25 basis point cut in rates.

The repo rate has been brought down from a high of 8 percent since the start of this interest rate reduction cycle, which began in 2015. This cycle is now coming to a close as inflation starts to pick up even though growth remains weak.

Upside Risks To Inflation

While explaining its decision, the MPC listed upside risks to inflation and increased its inflation projection marginally for the year. It now expects inflation to range between 4.3-4.7 percent in the third and fourth quarters of the current fiscal.

MPC Statement…..the MPC decided to keep the policy repo rate on hold. However, keeping in mind the output gap dynamics, the MPC decided to continue with the neutral stance and watch the incoming data carefully. The MPC remains committed to keeping headline inflation close to 4 per cent on a durable basis.

Consumer price inflation climbed to 3.58 percent in October from a low of 1.5 percent in June. Core inflation, which excludes volatile food and energy prices, also remains elevated at 4.5 percent in October.

The MPC in its statement cited an increase in food and fuel inflation in recent months as a cause of concern. Inflation expectations have also firmed up, it said. It added that farm loan waivers and likely fiscal slippage will also have implications for inflation.

MPC Statement… implementation of farm loan waivers by select states, partial rollback of excise duty and VAT in the case of petroleum products, and decrease in revenue on account of reduction in GST rates for several goods and services may result in fiscal slippage with attendant implications for inflation.

Growth Forecast Maintained

The MPC maintained its forecast of 6.7 percent GVA growth for the current year, but noted that second quarter growth was weaker than it had anticipated.  Second quarter national income data showed that gross value added growth rebounded to 6.1 percent in the second quarter compared to 5.6 percent in the first quarter.

A shortfall in kharif production and rabi sowing pose downside risks to growth, it said. A pick-up in credit growth, an increase in capital raising from the equity markets, recapitalisation of public sector banks and progress in resolving stressed accounts can aid growth in coming quarters, the MPC said.

MPC StatementHowever, the MPC notes that the impact of these factors can be buttressed by reducing the cost of domestic borrowings through improved transmission by banks of past monetary policy changes on outstanding loans.

On liquidity, the MPC refrained from giving any guidance in its statement even though its acknowledged tightening liquidity conditions, which have pushed up bond yields. The 10-year benchmark yield has risen by 40 basis points since the start of October to above 7 percent now.

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