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RBI keeps repo rates unchanged at 6%; key takeaways
KV Prasad Jun 13, 2022, 06:35 AM IST (Published)
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Summary
The Reserve Bank of India kept its benchmark repo rate unchanged at 6.0% under the liquidity adjustment facility (LAF), in first policy meet of the 2018-19 financial year, in line with market expectations. The Monetary Policy Committee (MPC) also kept the reverse repo rate under the LAF unchanged at 5.75%, and the marginal standing facility (MSF) …
Continue reading “RBI keeps repo rates unchanged at 6%; key takeaways”
The Reserve Bank of India kept its benchmark repo rate unchanged at 6.0% under the liquidity adjustment facility (LAF), in first policy meet of the 2018-19 financial year, in line with market expectations.
The Monetary Policy Committee (MPC) also kept the reverse repo rate under the LAF unchanged at 5.75%, and the marginal standing facility (MSF) rate and the Bank Rate at 6.25 per cent.
The MPC’s decision is consistent with the neutral stance of monetary policy in achieving a medium-term target for consumer price index (CPI) inflation of 4 %.
Dr. Chetan Ghate, Dr. Pami Dua, Dr. Ravindra H. Dholakia, Dr. Viral V. Acharya and Dr. Urjit R. Patel voted in favour of the monetary policy decision. Dr. Michael Debabrata Patra voted for an increase in the policy rate of 25 basis points.
Read more here: Inflation worries, fiscal slippage cause RBI to keep repo rate unchanged at 6%
Key takeaways:
Taking these factors into consideration, projected CPI inflation for 2018-19 is revised to 4.7-5.1 per cent in H1:2018-19 and 4.4 per cent in H2, including the HRA impact for central government employees, with risks tilted to the upside. Excluding the impact of HRA revisions, CPI inflation is projected at 4.4-4.7 per cent in H1:2018-19 and 4.4 per cent in H2.
The 6th bi-monthly resolution of 2017-18 in February projected CPI inflation at 5.1 per cent in Q4:2017-18; and in the range of 5.1-5.6 per cent in H1:2018-19 and 4.5-4.6 per cent in H2, including the HRA impact, with risks tilted to the upside.
Actual inflation outcomes in January-February averaged 4.8 per cent, largely reflecting the sharp decline in vegetable prices and significant moderation in fuel group inflation. The available information suggests that vegetable prices continued to moderate in March as well. Accordingly, inflation in Q4:2017-18 is nowprojected at 4.5 per cent.
There are now clearer signs of revival in investment activity as reflected in the sustained expansion in capital goods production and still rising imports, albeit at a slower pace than in January.
Also read: RBI says investment activity, capital goods production boosts FY 19 GDP estimates
Growth has been recovering and the output gap is closing. This is also reflected in a pick-up in credit offtake in recent months. The large mobilisation of resources from the primary capital market should support investment activity further.
Global demand has been improving, which should encourage exports and boost fresh investment. On the whole, GDP growth is projected to strengthen from 6.6 per cent in 2017-18 to 7.4 per cent in 2018-19 – in the range of 7.3-7.4 per cent in H1 and 7.3-7.6 per cent in H2 – with risks evenly balanced.
International crude oil prices have become volatile in the recent period, with a distinct hardening bias in the second half of March, even as the increase in shale production was more than expected. This has adversely impacted the outlook for crude oil prices.
Also read: RBI meet: Uneventful policy, eventful press conference?
Indian domestic demand is expected to strengthen during the course of the year. Fourth, the statistical impact of an increase in HRA for central government employees under the 7th CPC will continue till mid-2018, and gradually dissipate thereafter.
Retail inflation, measured by the year-on-year change in the CPI, fell from a high of 5.1 per cent in January to 4.4 per cent in February due to a decline in inflation in food and fuel.
Food inflation declined by 120 bps in February, pulled down by a sharp decline in vegetable prices, especially of onions and tomatoes, along with continuing deflation in pulses. The fall in prices was also observed in other food components such as eggs, sugar, meat and fish, oils, spices, cereals and milk.
Inflation in respect of liquefied petroleum gas declined in line with international price movements. Furthermore, the rate of increase in prices of firewood and chips, and dung cake moderated.
CPI inflation excluding food and fuel remained unchanged at 5.2 per cent for the third consecutive month in February, after rising from its trough in June 2017.
Households’ inflation expectations, measured by the March 2018 round of the Reserve Bank’s survey of households, edged up for both three-month and one-year ahead horizons.
Manufacturing firms covered in the Reserve Bank’s Industrial Outlook Survey reported input price pressures and an increase in selling prices in Q4:2017-18, which are expected to continue in Q1:2018-19. Manufacturing and services firms polled by PMI also showed a rise in input and output prices in Q4.
Liquidity in the system moved between surplus and deficit during February-March 2018. From a daily net average surplus of ` 272 billion during February 1-11, 2018, liquidity moved into deficit during February 12-March 1, reflecting a slowdown in government spending and large tax collections.
After turning into surplus during March 2-15, the system moved into deficit again during March 16-22 mainly on account of quarterly advance tax outflows.
Anticipating the seasonal tightening of liquidity at the end of March, the Reserve Bank conducted four additional longer tenor (24-31 days) variable rate repo operations aggregating ` 1 trillion, apart from the regular repo operations.
In mid-March, additional liquidity of ` 1 trillion got released into the system through redemption of Treasury Bills issued under the Market Stabilisation Scheme (MSS) in April and May 2017
On the whole, the Reserve Bank injected ` 60 billion and ` 213 billion on a net daily average basis in February and March, respectively. The weighted average call rate (WACR) inched closer to the policy repo rate from 12 basis points below the policy rate in January to 7 bps in February, and 5 bps in March.
Merchandise export growth decelerated in January and February 2018, pulled down by a slowdown in exports of gems and jewellery, readymade garments and engineering goods.
As import growth continued to exceed export growth in January-February, the trade deficit widened. The current account deficit increased in Q3:2017-18, primarily on account of the higher trade deficit.
Net foreign direct investment moderated in April-January 2017-18 visà-vis the level a year ago. Foreign portfolio investors made net purchases in 2017-18, despite net sales in the wake of a global sell-off in February. India’s foreign exchange reserves were at US$ 424.4 billion on March 30, 2018.
Read the full text here: RBI keeps repo rate unchanged at 6%; CPI inflation medium-term target at 4%
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