The Reserve Bank of India (RBI) on Wednesday kept interest rates unchanged and warned that inflation risks were skewing upwards.
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The central bank raised its March quarter Consumer Price Index (CPI) inflation forecast to 5.1% and projected an inflation range of 5.1-5.6% in the first half of the next fiscal year.
However, RBI posits a revival in growth—projecting an acceleration in economic growth to 7.2% from a level of 6.6% in the current fiscal year. It premises this on a host of factors including revival in investment demand and strengthening exports.
By opting to hold interest rates despite its evinced concerns about the growing threat of inflation, the central bank has signalled it will do its bit to protect the nascent recovery underway in the economy.
RBI’s monetary policy committee (MPC) decided to keep the repo rate—at which the central bank infuses liquidity into the banking system—on hold at 6%. Five members of the panel voted to keep rates unchanged, while Michael Patra, executive director at the central bank, wanted to raise rates by 25 basis points. A basis point is one-hundredth of a percentage point.
The inflation outlook is “clouded by several uncertainties”, the committee noted. It listed the staggered impact of housing rent allowance increases by the state governments, rising prices of crude oil and other commodities owing to a pick-up in global growth, increase in minimum support prices for kharif crops, the budget’s hike in custom duties and the fiscal slippage as several factors.
There is “need for vigilance around the evolving inflation scenario in the coming months”, the panel noted.
However, it voted to maintain the neutral stance of monetary policy, which essentially means future calls on rate direction would be data-driven and in either direction.
“Taking all that into account, we felt that, at this stage, without more data coming in, it was not necessary to change the repo rate or the stance,” RBI governor Urjit Patel said in a press conference.
Wednesday’s decision comes at a time when inflation as measured by the CPI has been accelerating and has topped 4%, the central bank’s medium-term target, for two consecutive months.
The latest data shows CPI inflation accelerated to 5.21% in December, the fastest pace in 17 months, from 4.88% in November. The rise was partly due to the statistical impact of a low base.
Despite the rise in the inflation forecast, economists are not expecting higher interest rates.
“In addition, the central bank has acknowledged that growth is in the nascent stage of recovery and it has to be nurtured. Given these factors, I don’t think that RBI will hike rates in at least next six months. Further rate action will depend on the incoming macroeconomic data pertaining to growth and inflation,” said D.K. Joshi, chief economist at credit rating agency Crisil.
A stabilizing goods and services tax (GST) regime, improving credit offtake, rising capital goods production and recapitalization of banks augur well for economic growth, the MPC noted. “On the downside, the deterioration in public finances risks crowding out of private financing and investment.”
Saugata Bhattacharya, chief economist at Axis Bank, said, “Hiking the repo rate in the near future might prove a growth impediment. In any case, there is significant uncertainty on inflation projections, and till more clarity emerges on drivers, any rate change is unlikely.”
Bond markets were relieved. Yield on 10-year government bonds fell, closing at 7.53% from its previous close of 7.568%.
RBI deputy governor Viral Acharya said that system liquidity, which is currently in surplus, is steadily moving towards its stated objective of neutral mode.
He added that while RBI is ready to provide liquidity for frictional needs (liquidity mismatches due to temporary reasons), which are usually a short-lived problems, the central bank’s liquidity operations are driven by its monetary policy objective and the need to meet reserve demands of the economy reserve.
“Except in rate, economy-wide circumstances, the goal of RBI’s liquidity operations is not to manage the prices of any particular long-term asset market,” he said.
Source : Live Mint