On February 7, 2018, the monetary Policy Committee of the Reserve Bank of India (RBI) in its bi-monthly review decided not to change interest rates. The repo rate (the rate at which RBI infuses liquidity into the banking system) was kept at 6 per cent. Of the six members of the monetary policy committee, five, namely, Chetan Ghate, Pami Dua, Ravindra H. Dholakia, Viral V. Acharya and Urjit R. Patel, voted in favour of keeping the rates unchanged, while one, Michael Debabrata Patra, wanted the rates raised by 25 basis points.The committee headed by RBI Governor Urjit Patel had last reduced the benchmark lending rate by 0.25 percentage points to 6 per cent, bringing it to a 6-year low, in August 2017.
On the price front, the central bank warned about inflation: the March quarter Consumer Price Index (CPI) inflation forecast was raised to 5.1 per cent; an inflation range of 5.1-5.6 per cent was projected in the first half of the next fiscal year.
Among the reasons the RBI listed for the uncertainties clouding the inflation outlook were: the staggered impact of the increase in housing rent allowance made by the state governments, rising price of crude oil and other commodities in the wake of a pick-up in global growth, rise in minimum support prices for kharif crops, the budget’s increase of custom duties and the fiscal slippage.
The RBI, however, looks optimistically at the economic growth front, projecting an acceleration in economic growth to 7.2 per cent from the 6.6 per cent in the current fiscal year. This projection is based on a number of factors such as revival in investment demand and strengthening exports.
In the light of the signs of recovery being seen in the economy, the RBI seems to have decided that it had to nurture that recovery by holding the interest rates despite the threat of inflation. Future decisions on rates would be driven by data pertaining to growth and inflation,and could be in either direction.
Factors that augur well for the economic growth included the stabilising goods and services tax (GST) regime, improving credit offtake, rising capital goods production and recapitalisation of banks, according to the monetary policy committee. On the flip side were “the deterioration in public finances risks crowding out of private financing and investment.”
The decision of the monetary policy committee is consistent with the neutral stance of monetary policy in keeping with the objective of achieving the medium-term target for CPI inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.
Points to Note
- A basis point is one-hundredth of a percentage point.
- As the repo rate has not changed, the reverse repo rate under the LAF remains at 5.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 6.25 per cent.
- Inflation as measured by the CPI has been rising and has exceeded 4 per cent, the central bank’s medium-term target, for two consecutive months.
- CPI inflation had gone up to 5.21 per cent in December 2017, the fastest pace in 17 months, from 4.88 per cent in November 2017. The increase was partly due to the statistical impact of a low base.
- RBI projected retail inflation in the range of 5.1-5.6 per cent for the first half of 2018-19, while assuming a normal monsoon.
- The monetary policy committee has a mandate to ensure inflation remains in a band between 2 per cent and 6 per cent.
- System liquidityis currently in surplus, but is steadily moving towards its stated objective of neutral mode.
- The central bank’s liquidity operations are driven by the objectives of its monetary policy and the need to meet reserve demands of the economy.