RBI keeps repo rate unchanged at 6%; cuts FY18 growth forecast to 6.7%

 BT Online        Last Updated: October 5, 2017  | 11:52 IST
RBI keeps repo rate unchanged at 6%; cuts FY18 growth forecast to 6.7%

The Reserve Bank of India (RBI) on Wednesday kept the repo rate unchanged at 6 per cent, maintaining the status quo in its 4th bi-monthly monetary policy statement. RBI's decision today goes against the wishes of industry bodies and government which were looking for a rate cut to spur economic growth and private investment. The central bank also revised real GVA growth projection for 2017-18 down to 6.7 per cent from the August 2017 projection of 7.3 per cent.

Meanwhile, India Inc expressed its disappointment with the RBI's decision to hold key policy rates unchanged. "In context of the current industrial situation, we felt there was a need for a further cut in the repo rate. Growth conditions remain under strain which is reflected in the persistently weak investment activity and the first quarter GDP growth numbers," Ficci President Pankaj Patel said.

"While RBI in the policy statement cites inflationary pressures to remain a concern, Ficci feels that we need to give equal consideration to growth prospects," Patel added. 

In a decision that was taken by a majority of 5 to 1, the Monetary Policy Committee (MPC) today decided to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.0 per cent, RBI said in a statement. 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 said in a statement.

The MPC expects inflation to rise from current level to 4.2 to 4.6 in the second half of this fiscal year. The teething problems related to Goods and Service Tax (GST) may get resolved in second half, RBI Governor Urjit Patel said during the press briefing following the MPC meet.   

The six member monetary policy committee (MPC) left cash reserve ratio (CRR) unchanged at 4 per cent, but the statutory liquidity ratio (SLR) requirement was cut by 50 basis points to 19.5 per cent.  The decision of the MPC is consistent with a 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, RBI said.

RBI said that the GST implementation had an adverse impact, rendering prospects for the manufacturing sector uncertain in the short term. This may further delay the revival of investment activity, which is already hampered by stressed balance sheets of banks and corporates. 

Some price revisions pending the Goods and Services Tax (GST) implementation have been taking place. There has been a broad-based increase in CPI inflation excluding food and fuel. International crude prices, which had started rising from early July, have firmed up further in September. Taking into account these factors, inflation is expected to rise from its current level and range between 4.2-4.6 per cent in the second half of this year, including the house rent allowance by the Centre, RBI pointed in its assessment.

Meanwhile, it was being speculated earlier that the central bank could keep interest rates unchanged on account of various reasons. Climbing retail inflation was one of them. The consumer price index (CPI), which the RBI tracks for adjusting its repo rate, moved up to 2.4 per cent in July  and 3.36 per cent in August after going as low as 1.54 per cent in June. Current account deficit is also growing after reaching 0.7 per cent of GDP in the last financial year on the back of rise in higher imports of gold and crude value terms.

The ongoing talk of fiscal stimulus to push country's slowing GDP can impact the fiscal deficit numbers if the matching revenues through tax and non-tax is not generated, and RBI was expected to wait and watch for the government moves in this direction before taking a call on changing the key policy rates.

RBI had reduced the policy repo rate by 25 basis points in its third bi-monthly monetary policy review of 2017-18. In its last meeting, the members of the monetary policy committee voted for easing interest rates by 25 basis points with a neutral stance, favoured by a a fall in food and core inflation and lower economic growth.


 

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