MUMBAI: The Reserve Bank of India (RBI) on Friday took a non-consensus view keeping key policy rates unchanged. The repo rate was retained at 6.5 per cent and the reverse repo rate stood untouched at 6.25 per cent, to the shock of markets and economists.
The six-member Monetary Policy Committee (MPC), however, changed its stance from neutral to calibrated tightening, indicating that more rate hikes are a possibility, should crude prices, external factors and inflation go out-of-whack.
The MPC’s decision opting for calibrated tightening is in line with its objective to achieve the medium-term inflation target of 4 per cent, while supporting growth.FY19’s growth projection remained unchanged at 7.4 per cent, while headline inflation projections for Q2 are revised downwards to 4 from 4.6 per cent and to 3.9-4.5 per cent for H2 from 4.8 per cent.
Welcoming the policy move, Economic Affairs Secretary Subhash Chandra Garg said the government’s inflation assessment was in line with the MPC’s assessment. “We believe growth should turn out to be higher than that projected by MPC,” he tweeted.
According to the MPC, inflation outlook calls for a close vigil over the next few months, especially since the output gap has virtually closed and upside risks persist. “Improving capacity utilisation, larger FDI inflows and increased financial resources to the corporate sector augur well for investment activity. However, both global and domestic financial conditions have tightened, which may dampen it,” the MPC noted.
On the other hand, Patel said currency depreciation was adding to the upside risk for emerging markets and that global trade was losing pace, which could pose huge risks to our growth and inflation outlook. “It is imperative to further strengthen the domestic macroeconomic fundamentals,” he said.
On kharif sowing, Patel said it has weathered initial setbacks and though the outlook for food inflation is benign, the impact of minimum support price hike on food inflation appears uncertain for now. Any fiscal slippage would impact inflation outlook, he explained.
Growth outlook
■ FY19’s growth projection remained unchanged at 7.4 per cent
■ Headline inflation projections for Q2 are revised downwards to 4 from 4.6 per cent and to 3.9-4.5 per cent for H2 from 4.8 per cent