MUMBAI: The Reserve Bank of India on Wednesday kept its main repo rate at 6 percent for a third straight policy meeting at its final bi-monthly monetary policy review of the fiscal and retained its "neutral" stance, seeking to support a slowing economy even as inflation has accelerated to a 17-month high.
The reverse repo rate was held at 5.75 per cent.
It opted widely expected status quo in key rates citing inflation concerns and flagged risks from wider fiscal deficit.
Meanwhile, the Reserve Bank is expecting retail inflation to rise to 5.1 per cent in the last quarter of the ongoing fiscal due to rising crude oil prices and hike in salary components of government employees.
The central bank has also projected inflation to be in the range of 5.1-5.6 per cent in the first half of 2018-19.
The decision of the Monetary Policy Committee (MPC) is consistent with the neutral stance of the central bank aimed at achieving its medium-term target for CPI (consumer price index) of 4 per cent within a band of +/- 2 per cent, while supporting growth, the RBI in a statement said.
Repo rate is the rate at which the central bank of a country lends money to commercial banks against securities in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation. Reverse repo rate is the rate at which the RBI borrows money from the commercial banks.
In case of inflation, central banks increase repo rate as this acts as a disincentive for banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in arresting inflation. Similarly, the central bank will decrease the repo rate in case of a deflationary environment.
Following are the highlights of the RBI's 6th bi-monthly monetary policy statement:
Key lending rate (repo) unchanged at 6 pc;
Reverse repo rate remains at 5.75 pc and marginal standing facility (MSF) rate and Bank Rate at 6.25 pc;
Monetary policy's stance neutral;
Petrol and diesel prices rose sharply in Jan, reflecting lagged pass-through of past increases in global crude prices;
Retail inflation estimated at 5.1 pc in Q4 this fiscal and 5.1-5.6 pc in H1 of FY2018-19;
Inflation likely to ease to 4.5-4.6 per cent in H2 of FY19;
Gross Value Added (GVA) growth for FY18 seen at 6.6 pc;
GVA growth for 2018-19 projected at 7.2 pc;
GST stabilising, which augurs well for economic activity;
Early signs of revival in investment activity;
RBI seeks pick-up in credit growth due to recapitalisation of PSBs and resolution proceedings under IBC;
Export growth expected to improve further on account of improving global demand;
RBI says focus of Union Budget on rural and infrastructure sectors a welcome development;
Five members voted in favour of status quo in interest rate; one member voted for increase of 0.25 pc;
Next meeting of the MPC on April 4 and 5.
The resolution of the 6-member Monetary Policy Committee (MPC) said "the inflation outlook is clouded by several uncertainties on the upside", flagging risks from 7th pay panel implementation in states, high oil prices, hike in customs duties and fiscal slippage to 3.5 per cent in 2017-18 and a higher target for 2018-19.
"Fiscal slippage as indicated in the Union Budget could impinge on the inflation outlook. Apart from the direct impact on inflation, fiscal slippage has broader macro-financial implications, notably on economy-wide costs of borrowing which have already started to rise. This may feed into inflation," it warned.
Deterioration in public finances risks crowding out of private financing and investment, it said, adding that the nascent recovery needs to be carefully nurtured.
RBI said however that it is too early to assess the impact of the minimum support prices hike in foodgrains and the impact on inflation.
RBI also upped its inflation forecast to 5.1 per cent for the ongoing fourth quarter of 2017-18 and expects it to firm up further to 5.1-5.6 per cent in first half of the next fiscal, before cooling down to 4.5-4.6 per cent in the second half.
On the positive side, MPC said there are mitigating factors like subdued capacity utilisation and moderate growth in rural wage, while welcoming the focus of Union Budget 2018 -19 on rural and infrastructure spending.
RBI also lowered its growth target to 6.6 per cent for the current fiscal ending on March 31, from 6.7 per cent earlier, but said that it will accelerate to 7.2 per cent in 2018-19.
Five members of the panel, including RBI Governor, voted for a status quo while executive director Michael Patra was the lone member who wanted the key rate to be hiked.
On volatility in global financial markets, RBI said it is due to uncertainty over the pace of normalisation of the US Fed monetary policy.
A majority of watchers were expecting the MPC to go for a status quo in rates with a hawkish commentary on inflation concerns.
Inflation accelerated to 5.2 per cent in December, from the 5 per cent level in the previous month. The RBI is bound to keep the headline price rise number at 4 per cent with a two percentage point leeway on either side.
At the last policy review, it had raised the inflation forecast to 4.3-4.7 per cent for the second half of the current fiscal.
Factors which can fuel price rise include a proposed increase in minimum support prices for grains, a rally in oil prices and the government deviating from the fiscal consolidation roadmap to target a wider 3.2 per cent deficit in 2018-19.
On the economic growth front, there has been some improvement as the effects of the twin blows of demonetisation and GST implementation are waning. The government is expecting a 7-7.5 per cent growth in 2018-19.
The RBI had switched stance to neutral from being accommodative in February last year as it saw rise in inflation. It had last cut the repo rate by 0.25 per cent in the August 2017 monetary policy review.
(With inputs from Reuters and Online desk)