The Reserve Bank of India chose to maintain a status quo stance and retain its key interest rate, the repo rate, at 6 per cent. The central bank has been in this mode for its previous two meetings also, after it last cut rates at its August 2017 meeting. The RBI’s Monetary policy committee had its sixth bimonthly meeting for this fiscal yesterday and today. The decision of the 6-member committee was by a majority of 5 to 1.

Dr Chetan Ghate, Dr Pami Dua, Dr Viral V. Acharya, Dr Urjit R. Patel and Dr Ravindra Dholakia were all in favour of status quo while Dr Michael Patra was in favour of a 25 bps hike.

The Monetary policy committee’s (MPC) decision was in line with market consensus that there would be no change in rates, although the tone of the statement was expected to be hawkish.

Growth outlook

The MPC expects GVA to be at 6.6 per cent, a tad bit lower than what was projected earlier. Beyond the current year, the growth outlook will be influenced by several factors.

First, GST  implementation is stabilising, which augurs well for economic activity. Second, there are early signs of revival in investment activity as reflected in improving credit offtake, large resource mobilisation from the primary capital market, and improving capital goods production and  imports. Third, the process of recapitalisation of public sector banks has got underway. Large  distressed borrowers are being referenced for resolution under the Insolvency and Bankruptcy Code (IBC). This should improve credit flows further and create demand for fresh investment. Fourth, although export growth is expected to improve further on account of improving global demand, elevated commodity prices, especially of oil, may act as a drag on aggregate demand.

Taking into consideration the above factors, GVA growth for 2018-19 is projected at 7.2 per cent overall – in the range of 7.3-7.4 per cent in H1 and 7.1-7.2 per cent in H2 – with risks evenly  balanced.

Inflation estimates

Inflation projections for the fourth quarter is expected to be 5.1 per cent. This is significantly higher than the 4.3- 4.7 per cent range that it forecast at its earlier meeting in December. Actual retail inflation had touched a 17-month high of 5.2 per cent in December, significantly higher than the RBI target of 4 per cent.

"In terms of actual  outcomes, headline inflation averaged 4.6 per cent in Q3, driven primarily by an unusual pick-up in food prices in November. Though prices eased in December, the winter seasonal food price moderation was less than usual, " RBi said.  Domestic pump prices of petrol and diesel rose sharply in January, reflecting lagged pass-through of the past increases in international crude oil prices.

For the next year inflation projections have again inched up.

The RBI said that CPI inflation for 2018-19 is estimated in the range of 5.1- 5.6 per cent in the first half including diminishing statistical HRA impact of central government employees , and 4.5- 4.6 per cent in H2, with risks tilted to the upside. The projected moderation in inflation in the second half is on account of strong favourable base effects, including unwinding of the 7 th CPC’s HRA impact, and a softer food inflation forecast, given the assumption of normal monsoon and effective supply management by the Government, the statement said.

In the backdrop of the budget announcement last week market players saw the likelihood of higher inflation in the coming fiscal, given the promise of higher minimum support prices as well as the announcement of a universal health care scheme (not yet fully funded).

Risks

While welcoming the rural and infrastructure focus in the budget, the RBI also cautioned that the deterioration of public finances could risk crowding out private finance and investment activity.

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