RBI keeps interest rates unchanged on inflation risks

The Dollar Business Bureau

The Reserve Bank of India (RBI), in its sixth bimonthly Monetary Policy Committee meeting, on Wednesday kept the repo rate unchanged at 6%, while hinting on tight monetary conditions due to rising inflation risks.

The Bank also increased the Consumer Price Index (CPI) inflation forecast for March-end to 5.1% and estimated that inflation would be in the range of 5.1-5.6% in the first six months of the next fiscal.

“On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) decided to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6%,” RBI said in a statement.

“Consequently, the reverse repo rate under the LAF remains at 5.75%, and the marginal standing facility (MSF) rate and the Bank Rate at 6.25%,” it added.

The decision of the MPC is consistent with the neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for CPI inflation of 4% within a band of +/- 2%, while supporting growth, the statement said.

“The inflation outlook beyond the current year is likely to be shaped by several factors. First, international crude oil prices have firmed up sharply since August 2017, driven by both demand and supply side factors. Second, non-oil industrial raw material prices have also witnessed a global uptick. Third, the inflation outlook will depend on the monsoon, which is assumed to be normal,” said the Central Bank.

“Taking these factors into consideration, CPI inflation is estimated in the range of 5.1-5.6% in first of half of 2018-19, including diminishing statistical HRA impact of central government employees, and 4.5-4.6% in second half, with risks tilted to the upside,” it added.

The six-member MPC, chaired by RBI Governor Urjit Patel, warned about the risks from the next year’s Government borrowing plans, which can possibly push up inflation and loan rates for companies and consumers.

In addition, the central bank has cut the growth estimates for the current financial year to 6.6% from the previous 6.7%. However, it has projected growth of 7.2% for the next financial year.