Our Bureau The RBI sprang no surprises on Thursday, as its monetary policy committee (MPC) voted to keep the policy repo rate on hold at its first bi-monthly policy review of the new fiscal.
The MPC said it saw inflationary risks from the Centre’s proposal to hike minimum support prices for kharif crops, fiscal slippage at the Central and State levels, expected increases in house rent allowances by State governments, and volatility in crude prices. It voted 5-1 in favour of status quo in policy rates.
Consequently, the repo rate remains unchanged at 6 per cent. It was last revised in August 2017, when it was cut from 6.25 per cent to 6 per cent.
However, the MPC lowered the retail inflation (CPI) projection for the first-half of FY19 to 4.7-5.1 per cent from 5.1-5.6 forecast in the last policy review (in February). The MPC also pared CPI for the second half of FY19 to 4.4 per cent from 4.5-4.6 forecast earlier.
“...In (keeping rate unchanged), the MPC reiterated its commitment to keep inflation at the target of 4 per cent in the medium term; remain vigilant on how... inflation unfolds (in other words we continue to be data dependent),” said Urjit Patel, Governor, RBI.
The RBI expects GDP growth to strengthen from 6.6 per cent in FY18 to 7.4 per cent in FY19.
“...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...Second, global demand has been improving, which should encourage exports and boost fresh investment,” the MPC said.
To promote greater credit discipline among working capital borrowers, the RBI is planning a minimum level of ‘loan component’ in fund-based working capital finance for large borrowers. “The working capital requirements of borrowing entities are met by banks through a cash credit (CC) limit, a revolving facility. The CC facility places undue burden on banks in managing their liquidity requirements with corresponding repercussions for RBI’s liquidity operations,” said RBI Deputy Governor NS Vishwanathan.
Currently, banks do not charge any commitment fee and do not maintain capital on the undrawn portion of the CC because it is classified as an unconditionally cancellable facility, which does not have any risk weight under the Basel rules.
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