
MUMBAI: Breaking the 10-month pause, the RBI cut benchmark repo rate by 25 bps to six per cent. But, Wednesday’s rate cut is unlikely to herald another rate easing cycle, as the central bank’s Monetary Policy Committee (MPC) maintained neutral stance citing upward risks to inflation.
According to RBI Governor Urjit Patel, several factors including farm loan waivers, GST rollout and implementation of the 7th Pay Commission benefits by states will likely spike headline inflation in the coming months.
“Excluding the HRA impact, which will affect the CPI cumulatively, inflation would be a little over 4 per cent by the fourth quarter against 4.5 per cent inclusive of the HRA in the June statement,” Patel said.
RBI has a mandate to keep inflation close to 4 per cent, with a plus or minus bias of two per cent. Retail inflation fell to a historic low of 1.54 per cent in June, driven by both transitory and structural factors. According to RBI, the implementation of farm loan waivers by states may result in possible fiscal slippages and undermine the quality of public spending, entailing inflationary spillovers.
It added that given the limits on raising market borrowings and taxes by states, farm loan waivers were likely to compel a cutback on capital expenditure, with adverse implications for the already dampened capex cycle.
“The MPC remains focused on its commitment to keeping headline inflation close to 4 per cent on a durable basis,” RBI said in its bi-monthly policy statement.
Meanwhile, the twin-balance sheet problem and bad loans continue to be RBI’s top priority, said Virla Acharya, deputy governor, RBI, while Patel said the central bank was working closely with the government to resolve the bad loan mess. The central bank made no change in its growth projections for the current fiscal, with the forecast for real GVA pegged at 7.3 per cent, unchanged from the June policy’s review.
“There’s an urgent need to invigorate private investment and remove bottlenecks. RBI is working to resolve large corporate loans,” Patel said. Notwithstanding the much-awaited rate cut, markets ended with a negative bias. While the BSE index Sensex slipped from a record high to end 98.43 points lower at 32,476.74, Nifty fell 33.15 points to 10,081.50.