CPI inflation projected 4.5% and GVA growth at 7.4% for 2017-18
The Reserve Bank of India (RBI) in its first monetary policy review has kept its key policy interest rate, repo rate, unchanged at 6.25%. however, consequent upon the narrowing of the LAF corridor to 25 basis points from 50 basis points earlier, as elaborated in the accompanying Statement on Developmental and Regulatory Policies, the reverse repo rate under the LAF is at 6.0% (5.75% earlier), and the marginal standing facility (MSF) rate and the Bank Rate are at 6.50% (6.75% earlier).The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth. The main considerations underlying the decision are set out in the statement below.
Since the February bi-monthly monetary policy statement, inflation has been quiescent. Headline CPI inflation is set to undershoot the target of 5.0% for Q4 of 2016-17 in view of the sub-4% readings for January and February. For 2017-18, inflation is projected to average 4.5% in the first half of the year and 5% in the second half.
GVA growth is projected to strengthen to 7.4% in 2017-18 from 6.7% in 2016-17, with risks evenly balanced.
Overall, the MPC's considered judgement call to wait out the unravelling of the transitory effects of demonetisation has been broadly borne out. While these effects are still playing out, they are distinctly on the wane and should fade away by the Q4 of 2016-17.
While inflation has ticked up in its latest reading, its path through 2017-18 appears uneven and challenged by upside risks and unfavourable base effects towards the second half of the year. Moreover, underlying inflation pressures persist, especially in prices of services. Input cost pressures are gradually bringing back pricing power to enterprises as demand conditions improve.
The MPC remains committed to bringing headline inflation closer to 4.0% on a durable basis and in a calibrated manner. Accordingly, inflation developments have to be closely and continuously monitored, with food price pressures kept in check so that inflation expectations can be re-anchored. At the same time, the output gap is gradually closing. Consequently, aggregate demand pressures could build up, with implications for the inflation trajectory.
Against this backdrop, the MPC decided to keep the policy rate unchanged in this review while persevering with a neutral stance. Six members voted in favour of the monetary policy decision. The future course of monetary policy will largely depend on incoming data on how macroeconomic conditions are evolving. Banks have reduced lending rates, although further scope for a more complete transmission of policy impulses remains, including for small savings/administered rates. Along with rebalancing liquidity conditions, it will be the Reserve Bank's endeavour to put the resolution of banks' stressed assets on a firm footing and create congenial conditions for bank credit to revive and flow to productive sectors of the economy.
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