As was widely expected, the six-member Monetary Policy Committee of the RBI decided on Wednesday to keep the policy rate on hold, but for the first time since the panel was entrusted with the task of fixing the benchmark rate in October 2016, the decision was not unanimous.

It cited inflationary pressures arising, among others, from rising rural wages, robust consumption demand, imminent implementation of the Seventh Central Pay Commission’s award on house rent allowance, and the possibility of global risks materialising in the form of imported inflation to keep the rate on hold with a neutral stance.

Reserve Bank of India Governor Urjit Patel said: “With so many moving parts and the outlook clouded with uncertainty, the MPC decided by a vote of 5-to-1 to stay on hold and wait for greater clarity to emerge with incoming data.

“...As the government and the RBI embark on resolving the twin debt hangover problems — over-leveraged corporate sector and stressed banking sector — we felt that more targeted interventions that can unfreeze credit to help the stress-free but recently slowing sectors of the economy borrow at better terms are likely to work better.”

Repo rate kept at 6.25% This is the fourth time on the trot that the repo rate (the interest rate at which banks borrow funds from the RBI to overcome short-term liquidity mismatches) has been kept steady at 6.25 per cent.

The committee cut inflation projection for the first half of the year to 2-3.5 per cent (from 5 per cent projection made in April) and the second half projection to 3.5-4.5 per cent (4.5 per cent). It also pared the gross value added (GVA) growth projection for FY2018 to 7.3 per cent from 7.4 per cent in April.

Viral Acharya, Deputy Governor, said: “Last month’s inflation print and the revised growth estimates have certainly raised difficult policy questions. We will watch carefully in the next few months the incoming data on inflation as well as the indicators of real economic activity…..and if data so warrant, then act for a broader accommodation through the interest rate policy.”

The central bank cut the statutory liquidity ratio (SLR) — the proportion of deposits that banks have to invest in government securities — to 20 per cent of deposits from 20.5 per cent.

To a specific question on the rising demand for farm loan waivers across various States, following the UP government’s decision to waive crop loans up to ₹1 lakh of small and marginal farmers in the State, Patel observed that the risk of fiscal slippages, which by and large can entail inflationary spillovers, has risen with the announcements of the large farm loan waivers.

“There is a risk that unless there is existing fiscal space in State government budgets or some space is found, the likelihood of going down the slippery path and dissipating the important gains that we have made in fiscal rectitude over the last two-three years can come about. Past episodes in our country have shown that when there are significant fiscal slippages, they do permeate through to inflation sooner or later. So, it is a path we need to tread very carefully and before it gets out of hand,” explained the Governor.

Boost to the housing sector In a bid to give a boost to the housing sector and reduce home loan rates further, the RBI has reduced risk weights (the amount of capital banks need to set aside for making a loan) for certain categories of home loans sanctioned with effect from June 7.

It also decided to reduce the standard asset provisioning rate on such loans from 0.40 per cent to 0.25 per cent.

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