RBI keeps repo rate unchanged

Context:

  • The Reserve Bank of India’s monetary policy committee on Wednesday decided to maintain status quo on the policy repo rate as it saw inflationary pressure building up in the economy.

Key rates unchanged:

  • The Monetary Policy Committee (MPC) was headed by RBI Governor Urjit Patel .
  • The repo rate remains at 6.0%, the reverse repo at 5.75% and the bank rate at 6.25%.
  • The marginal standing facility (MSF) rate and the Bank Rate at 6.25 per cent.
  • The GVA (gross value added) growth for 2018-19 has been projected at 7.2 per cent .

RBI’s forecast:

  • The RBI projected retail inflation in the range of 5.1-5.6% for the first half of 2018-19.
  • The RBI pared its 2017-18 GVA growth estimate to 6.6%, and forecast that the pace would quicken to 7.2% in the next fiscal year.
  • The RBI has forecast consumer price index inflation to be in the 5.1-5.6 per cent range during April-September 2018, and 4.5-4.6 per cent during October 2018-March 2019, with risks tilted to the upside.
  • RBI projected an inflation range of 5.1-5.6% in the first half of the next fiscal year.

Rationale behind RBI’s decision to unchanged key policy rates:

  • The decision comes at a time when inflation as measured by the CPI has been accelerating and has topped 4%, the central bank’s medium-term target, for two consecutive months.
  • The latest data shows CPI inflation accelerated to 5.21% in December, the fastest pace in 17 months, from 4.88% in November. The rise was partly due to the statistical impact of a low base.
  • Upward risks to inflation and lowered the growth projections for this year marginally.
  • The Reserve Bank of India (RBI) kept interest rates unchanged and warned that inflation risks were skewing upwards.
  • The RBI kept the rates unchanged because inflationary pressure building up in the economy.

Factors those were responsible for higher inflation in the economy are given below:

The inflation scenario has been getting more worrying. These include the staggered impact of:

  • Fuel inflation has been on an upward trajectory since July. This acceleration was seen due to an increase liquefied petroleum gas (LPG), kerosene, coke and electricity prices.
  • The staggered impact of Housing and Rent Allowance (HRA) by the various state governments may push up headline inflation further with ripple effects for the year ahead.
  • Due to rise in food prices in November and lower than expected moderation of winter food prices and as well the increase in HRA.
  • There was also the domestic rise in the prices of petrol and diesel rose in January. The prices rose due to the earlier increase in international crude oil prices which are being reflected in the country’s fuel prices.
  • The inflation outlook also factored an increase in the industrial raw material prices. This would lead to the rising costs passed on to consumers as the economy grows.
  • The increase in custom’s duty and the increase in fiscal slippage could impinge on the inflation outlook.
  • Revised guidelines for minimum support prices of kharif 
  • The MPC also noted that further risks to inflation in India could come from the broader financial volatility in global market. The volatility index (VIX) has climbed to its highest level since Brexit.
  • The impact of fiscal developments and normalisation of monetary policy by major advanced economies.

Impacts:

Positive:

  • It will have a positive impact on bond market.
  • The forbearance allowed to MSME borrowers
  • Broadening the definition of priority sector lending and simplification of repo directions among others are all positive steps towards a stable macro environment.

Negative:

  • Rising input costs are likely to be passed on to consumers.
  • 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.

Key policy rates:

Repo rate:

  • It is rate at which RBI lends to its clients generally against government securities

Reverse Repo Rate:

  • It is rate at which banks lend funds to RBI..

Bank rate:

  • It is rate charged by central bank for lending funds to commercial banks.
  • It influences lending rates of commercial banks.
  • Higher bank rate will translate to higher lending rates by banks.

Marginal standing facility (MSF):

Marginal standing facility (MSF) is a window for banks to borrow from the Reserve Bank of India in an emergency situation when inter-bank liquidity dries up completely.

Way ahead:

  • There is “need for vigilance around the evolving inflation scenario in the coming months”.
  • Improving capital goods production and imports.
  • There is need for credit flow further and create demand for fresh investments.
  • The nascent recovery in growth needs to be carefully nurtured.
  • Growth through conducive and stable macro-financial management.

Conclusion:

The MPC notes that the economy is on a recovery path, including early signs of a revival of investment activity. Global demand is improving, which should help strengthen domestic investment activity. The focus of the Union Budget on the rural and infrastructure sectors is also a welcome development as it would support rural incomes and investment, and in turn provide a further push to aggregate demand and economic activity

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