Five reasons why RBI kept repo rate unchanged at 6%

BT Online   New Delhi     Last Updated: October 4, 2017  | 16:57 IST
Five reasons why RBI kept repo rate unchanged at 6%

The Reserve Bank of India today maintained the status quo on current repo rate by keeping it 6 per cent. In its assessment, the RBI said that the decision of the MPC was consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index or CPI inflation of 4 per cent, while supporting growth. The government and many industry leaders were expecting a rate cut to create the demands, especially after recent economic slowdown. However, the Central bank decided to keep the rate unchanged on the account of rising inflation and widening current account deficit. It its assessment, the RBI said that India's current account deficit was 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. There were several other economic factors that led to this decision.

HERE'S WHAT THE MONETARY POLICY COMMITTEE SAID IN ITS ASSESSMENT


INFLATION

The RBI today said that retail inflation measured by year-on-year change in the consumer price index or CPI edged up in July and August to reach a five month high. "The MPC observed that CPI inflation has risen by around two percentage points since its last meeting," the central bank noted. It also said that the CPI inflation excluding food and fuel also increased sharply in July and further in August, reversing from its trough in June 2017. "Housing  inflation hardened further in August on account of higher house rent allowances for central government employees under the 7th central pay commission  award," the RBI said in its assessment. After a decline in prices in June, food inflation rebounded in the following two months.

GVA GROWTH

The RBI in its assessment said that India's real gross value added or GVA growth slowed significantly in the first quarter of 2017-18, cushioned partly by the extensive front-loading of expenditure by the government. It further said that the index of industrial production recovered marginally in July 2017 from the contraction in June. However, manufacturing remained weak, the central bank noted. The manufacturing sector - the dominant component of industrial GVA - grew by 1.2 per cent, the lowest in the last 20 quarters.

Current Account Deficit

The monetary policy committee in its report said that the sharper increase in India's imports relative to exports resulted in a widening of the current account deficit in the first quarter of 2017-18. Net foreign direct investment at USD 10.6 billion in April-July 2017 was 24 per cent higher than during the same period of last year. While the debt segment of the domestic capital market attracted foreign portfolio investment of USD 14.4 billion, there were significant outflows in the equity segment in August-September on account of geo-political uncertainties and expected normalisation of Fed asset purchases, the RBI said.

Export and Service

The RBI assessment revealed that while merchandise export growth picked up in August 2017, India's export growth continued to be lower than that  of  other emerging economies such as Brazil, Indonesia, South Korea, Turkey and Vietnam, some of which have benefited from the global commodity price  rebound. On service side, the monetary policy committee in its report referred to many indicators that pointed to improved performance even as the services purchasing managers' index or PMI continued in the contraction zone in August. The RBI also said that the cement production, cargo handled at major ports, domestic air freight and passenger traffic showed weak performance.  On the services side, the picture remained mixed.

GST

The monetary policy committee said that the implementation of the GST so far appears to have 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," the RBI said. The committee assessment also revealed that the consumer confidence and overall business assessment of the manufacturing and services sectors surveyed by the Reserve Bank weakened  in  the second quarter of 2017-18. Considering above factors, the RBI revised revised down the projection of real GVA growth from 7.3 per cent to 6.7 per cent for 2017-18.

 

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