Mumbai: The Reserve Bank of India’s (RBI) monetary policy committee (MPC) on Wednesday kept the key interest rate unchanged as it feared that inflation may top the central bank’s medium-term target of 4%.
The decision was in line with market expectations as most economists expected the central bank to keep the key repo rate—the rate at which it infuses liquidity in the banking system—unchanged at 6%. It also maintained its neutral policy stance.
Noting several upside risks to inflation, RBI raised its fiscal second half inflation estimate range marginally to 4.3-4.7%.
The panel noted that there were several factors that threatened to push up inflation in the near term such as rising food and fuel prices, increase in input costs, implementation of farm loan waivers by select states. It also highlighted the partial roll back of excise duty on petroleum products and the decrease in revenue on account of the cut in goods and services tax (GST) rates posing dangers to the fiscal deficit target, which could push inflation.
Recent data showed that country’s fiscal deficit at the end of October hit 96.1% of the budget estimate for 2017- 18, mainly due to lower revenue realization and rise in expenditure.
For 2017-18, the government aims to bring down the fiscal deficit to 3.2% of GDP. Last fiscal, it had met the 3.5% target.
In the previous meeting in October, RBI had also maintained status quo on rates. Since then, inflation as measured by the Consumer Price Index has accelerated to 3.58%, the fastest pace in seven months, because of rising food and fuel prices.
The decision on the MPC was not unanimous. Ravindra Dholakia, one of the three external members of the MPC, suggested a rate cut of 25 basis points (bps). One basis point is one-hundredth of a percentage point.
RBI retained its fiscal 2018 forecast for growth in gross value added (GVA), a measure of economic output, at 6.7%.
The panel noted several factors that could push growth in the coming quarters such as the amount of funds raised from the capital markets, the improvement in the ease of doing business rankings, large distressed borrowers being referred for bankruptcy proceedings and the government’s Rs2.11 trillion bank recapitalisation programme. It noted that these could get a further shot in the arm if banks passed on past rate changes on to lending rates on outstanding loans.
RBI also reiterated its stance that future course of action will be data dependent.
“Keeping in mind the output gap dynamics, the MPC decided to continue with the neutral stance and watch the incoming data carefully. The MPC remains committed to keeping headline inflation close to 4 percent on a durable basis,” the panel said.