As widely expected, the Reserve Bank of India (RBI) kept repo rate unchanged at 6 per cent in its fifth bimonthly monetary policy meeting of FY18 that concluded on Wednesday.
Consequently, MSF (Marginal Standing Facility Rate) and Bank rate remained unchanged at 6.25 per cent each. The MPC voted 5:1 for its status quo while maintaining its neutral stance.
Inflation concerns resurface: The MPC noted that the headline inflation outcomes have evolved broadly in line with projections. Going forward, the inflation path will be influenced mainly by three factors - moderation in inflation excluding food and fuel observed in Q1, impact of HRA by the central government is expected to peak in December and third, the recent rise in international crude oil prices may sustain.
The MPC listed upside risks to inflation and increased 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.
Upasna Bhardwaj, Senior Economist, Kotak Mahindra Bank said, “Given that MPC members are fixated with anchoring 4 per cent inflation target and the upside risks emanating from higher oil prices, higher rural real wages, sticky core inflation and mean reversion of food prices, we find limited room for any further monetary accommodation this year.”
No relief for EMI payers: It's bad news for those who were hoping for some relief in the form of lower interest rates. However, senior citizens relying on yields from fixed income products can heave a sigh of relief as neutral monetary policy stance of RBI indicates stable interest rate in the immediate future.
RBI retains GVA growth projection: Shedding light on GVA, the apex bank in its release said that recent increase in oil prices may have a negative impact on margins of firms and GVA growth. Shortfalls in kharif production and rabi sowing pose downside risks to the outlook for agriculture. However, services and infrastructure sectors are likely to see improvement in demand. Hence, taking into consideration all the factors, the projection of real GVA growth for 2017-18 of the October resolution at 6.7 per cent has been retained.
Govind Sankaranarayanan, Chief Operating Officer – Retail Business & Housing Finance, Tata Capital said, “The Indian economy’s revival - expressed through an increase in GDP growth rate and the first Moody’s rating upgrade in 14 years does not seem to have deterred the monetary policy committee from maintaining the status quo for a second session in a row. From an NBFC standpoint, we do not expect it to have a significant effect.”
Ease of biz doing ranking, PSBs recap a welcome move: There have been several significant developments in the recent period which augur well for growth prospects, going forward, it said in its release.
In its words, “Capital raised from the primary capital market has increased significantly after several years of sluggish activity. As the capital raised is deployed to set up new projects, it will add to demand in the short run and boost the growth potential of the economy over the medium-term." Second, the improvement in the ease of doing business ranking should help sustain foreign direct investment in the economy. Third, large distressed borrowers are being referenced to the insolvency and bankruptcy code (IBC) and public sector banks are being recapitalised, which should enhance allocative efficiency, it added.
On banking and liquidity: RBI Deputy Governor Viral Acharya said that banking system is moving towards neutrality. He said overhang surplus in banking has come down. "Will consider OMOs (open market operations) if liquidity is to be absorbed or injected on durable basis," he added.
Chetan Ghate, Pami Dua, Michael Debabrata Patra, Viral V. Acharya and Urjit R. Patel were in favour of the monetary policy decision, while Ravindra H Dholakia voted for a policy rate reduction of 25 basis points. The next meeting of the MPC is scheduled on February 6 and 7, 2018.
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