RBI keeps policy rates unchanged amidst a spike in inflation

The Reserve Bank of India (RBI) has kept its policy repo rate unchanged at 6 per cent for a third straight time at the close of a monetary policy meeting today even as the central bank said it would continue its "neutral" stance in its bid to support a slowing economy amidst a spike in inflation.

RBI governor Urjit Patel

The reverse repo rate stands at 5.75 per cent and the Bank Rate at 6.25 per cent.

RBI opted for status quo in key rates citing inflation concerns and flagged risks from wider fiscal deficit. The central bank projected inflation to be in the range of 5.1-5.6 per cent in the first half of 2018-19.

''On the basis of an assessment of the current and evolving macroeconomic situation at its meeting today, the Monetary Policy Committee (MPC) decided to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.0 per cent. Consequently, the reverse repo rate under the LAF remains at 5.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 6.25 per cent,'' RBI stated in a release.

RBI said the MPC's decision is consistent with the neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of (+/- 2) per cent, while supporting growth.

RBI is expecting retail inflation to rise to 5.1 per cent in the last quarter of the ongoing fiscal due to rising crude oil prices and hike in the salary of government employees.

The resolution of the 6-member Monetary Policy Committee (MPC) said, "the inflation outlook is clouded by several uncertainties on the upside", flagging risks from 7th pay panel implementation in states, high oil prices, hike in customs duties and fiscal slippage to 3.5 per cent in 2017-18 and a higher target for 2018-19.

"Fiscal slippage as indicated in the Union Budget could impinge on the inflation outlook. Apart from the direct impact on inflation, fiscal slippage has broader macro-financial implications, notably on economy-wide costs of borrowing which have already started to rise. This may feed into inflation," it warned.

Deterioration in public finances risks crowding out of private financing and investment, it said, adding that the nascent recovery needs to be carefully nurtured.

RBI said that it is too early to assess the impact of the minimum support prices hike in foodgrains and the impact on inflation.

RBI also upped its inflation forecast to 5.1 per cent for the ongoing fourth quarter of 2017-18 and expects it to firm up further to 5.1-5.6 per cent in first half of the next fiscal, before cooling down to 4.5-4.6 per cent in the second half.

However, MPC said there are mitigating factors like subdued capacity utilisation and moderate growth in rural wage, while welcoming the focus of Union Budget 2018 -19 on rural and infrastructure spending.

RBI also lowered its growth target to 6.6 per cent for the current fiscal ending 31 March, from 6.7 per cent earlier, but said that it will accelerate to 7.2 per cent in 2018-19.