RBI policy review: repo rate unchanged at 6%; inflation forecast raised for 2018

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As predicted by many experts in the industry, the Reserve Bank of India (RBI) maintained the repo rate at 6% in its bi-monthly monetary policy meet for December. Fear of rising inflation in the country is said to be the main reason behind this conservative policy review. In addition to maintaining the status quo in key interest rates, RBI also increased its inflation outlook for the upcoming quarter by 10 basis points.

policy review

The Monetary Policy Committee (MPC) headed by RBI governor Urjit Patel initiated deliberations yesterday with the intent of deciding on critical matters of the country’s monetary policy. Among the committee members, five out of six voted in favour of keeping the repo rate unchanged. Ravindra Dholakia, an economics professor from IIM Ahmedabad, is the lone committee member who voted for an interest rate cut.

Most industry analysts and economists believe that this policy review is in line with the expectations amidst the risk of high commodity prices. At present, inflation rate of the country stands at 3.58% which represents a seven-month high.

Core inflation (excluding food and energy prices) for the current period remains as high as 4.5%. For the next two quarters, RBI has raised its inflation forecast to 4.3% – 4.7% compared to its previous estimate of 4.2% – 4.6% owing to increase in crude oil price and commodity prices.

The government has been pushing for a rate cut by the RBI in order to boost economic growth in the country. Since the formation of the new MPC in October 2016, interest rates have been lowered twice. The most recent rate cut came in August 2017 when the RBI lowered the repo rate by 25 basis points.

There are various measures already taken by the government to revive the country’s economy. In a bid to lower the price of commodities, the GST council that met last month decreased the tax rate for more than 200 items. Moreover, the government has also announced a Rs.2.11 lakh crore capital infusion in public sector banks to increase credit growth.

Some of the key highlights of the policy review meet are as follows.

  • Reverse repo rate unchanged at 5.75%.
  • Cash reserve ratio unchanged at 4%.
  • Outlook for gross value added (GVA) growth retained at 6.7%.

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