MUMBAI:The Reserve Bank of India maintained status quo on Thursday, hinting that the prevailing 6.25 per cent repo rate is appropriate for the economy. Borrowers lost one of their last hopes for lower rates, as the central bank cited upside risks to inflation in FY18, which economists read as RBI hitting pause button.
The good news is that banks, flush with cash deposits from demonetisation, are cutting interest rates both on loans and deposits. Keeping the repo rate unchanged, the Monetary Policy Committee’s (MPC) 6-0 vote is letting inflation rule some way above its medium-term target of 4 per cent as it trades off the need to support growth.
Food prices could spike, should the south-west monsoon act up, and considering the hardening global commodities, metal and crude prices, consumers may have to brace up for higher monthly budgets. As per the RBI’s first bi-monthly monetary policy for FY18, inflation will head only in one direction: upwards. From the current 3.7 per cent, it will hover at 4.2 and 4.7 per cent in the first and second quarters of this fiscal respectively and briefly surpass 5 per cent in the third quarter before settling at 4.9 per cent by March, 2018.
For FY18, GDP growth is pegged at 7.4 per cent, lower than the potential 8-9 per cent. The textbook solution for higher growth is to lower policy rates, reduce borrowing costs and boost consumer spending. But in line with the central bank’s pragmatic approach, the MPC panel has set theoretical purity aside to keep key policy rate unchanged. This may not augur well with doves batting for rate cuts, as credit growth hit historic lows, corporate demand is weak, capacity utilisation is low, and there’s slack in services sector.
Meanwhile, the RBI panel raised the reverse repo rate -- a tool that allows RBI to borrow from banks and control money supply -- by 25 bps to 6 per cent. The quarter bps increase isn’t much, but in this case it counts as mildly cheerful considering the surplus liquidity aggregating `3.1 lakh crore as on March, 2017. The central bank is also working to debut Standard Deposit Facility (SDF) to suck out liquidity. It is being examined by the government and if introduced, would give RBI flexibility to manage money supply.