RBI keeps repo rate unchanged at 6%

Central bank projects retail inflation in 5.1-5.6% range in H1 2018-19; pegs GVA growth next fiscal at 7.2%

A security gard stands at the gates at Reserve Bank of India headquarters in Mumbai.

The Reserve Bank of India (RBI) on Wednesday held the policy repo rate at 6% as the central bank’s Monetary Policy Committee (MPC) raised the estimate for fourth-quarter inflation and flagged concerns about the future outlook for price gains.

Five of the six members of the RBI’s MPC voted in favour of keeping the benchmark interest rate unchanged for the third consecutive meeting, while one member, M.D. Patra, recommended a 25 basis points (bps) rate increase. While holding interest rates — as widely anticipated — the central bank also retained its ‘neutral’ policy stance.

Fuel prices impact

“Domestic pump prices of petrol and diesel rose sharply in January, reflecting lagged pass-through of the past increases in international crude oil prices,” the MPC said in its resolution. “Considering these factors, inflation is now estimated at 5.1% in Q4, including the HRA (house rent allowance) impact.” The RBI had in December projected inflation to range between 4.3-4.7% for second half of the current financial year. The central bank also projected retail inflation in the range of 5.1-5.6% for the first half of 2018-19, while assuming a normal monsoon — effectively ruling out any rate reduction in the near future.

The MPC has a mandate to ensure inflation remains in a band between 2% and 6%. For the second half of the next fiscal, inflation is projected at 4.5-4.6%, with ‘risks tilted to the upside’. Among the upside risks to inflation, the MPC noted that pick-up in global growth could exert further pressure on crude oil, with the higher minimum support price to farmers, announced in the Budget, adding to the uncertainty. However, the exact impact of higher MSP on inflation could not be fully assessed at this stage, the RBI said. The proposed increase in customs duty on a number of items and fiscal slippage could also impinge on inflation outlook, the RBI added.

RBI Governor Urjit Patel said a key factor that had spurred the rise in government bond yields was the slippage in the fiscal deficit.

“We have news of fiscal slippages at three levels. Fiscal slippage this year, fiscal slippage next year compared to what the market expected and what the target was and then a postponement of the medium term adjustment even further. If you look at all the factors it makes it very clear which way the bond yields are likely to move,” Dr. Patel told reporters.

‘No yield target’

Deputy Governor Viral Acharya said the RBI’s infusion of liquidity should not be seen as an effort to manage bond yields. “Except in rare, extraordinary economy-wide circumstances, the goal of RBI’s liquidity operations is not to manage directly the prices of any particular long-term asset market.”

The benchmark 10-year bond’s yield eased 4 bps to 7.53% on Wednesday. The RBI pared its 2017-18 GVA growth estimate to 6.6%, from December’s 6.7%.