The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC), during its first bi-monthly policy review meeting on Thursday, decided to keep repo rate and reverse repo rate unchanged at 6 per cent and 5.75 per cent, respectively. The decision of the MPC is consistent with the neutral stance of the monetary policy to achieve the medium-term target for consumer price index (CPI) inflation of 4 per cent.
During a conference after the release of the monetary policy, RBI Governor Urjit Patel said the committee reviewed evolving domestic and global macroeconomic conditions and decided to keep the repo rate at 6 per cent while continuing with the neutral stance of monetary policy. "The MPC reiterated its commitment to keep inflation at the target of 4 per cent in the medium term and to remain vigilant of how actual inflation unfolds, in other words we continue to be data dependent," Patel said.
The MPC noted that while the global economic activity has gathered a momentum, financial market volatility and potential trade wars pose a threat to the outlook. The RBI governor said the crude oil prices have become volatile in the recent period and that considerable uncertainty persists about the pace of normalisation - although not a direction of the monetary policy - by systemic central banks.
Patel said the MPC's assessment on the domestic economy was that while GDP in 2017-18 of 6.6 per cent was lower than a year ago, there were important intra-year turning points, including investment demand accelerated in second half of 2017-18, and that recent high frequency indicators point to some further strengthening with capital goods production registering a 19-month high growth in January this year.
On inflation front, the MPC said it's committed to achieve the medium-term target for headline inflation of 4 per cent. The committee also noted that there are several uncertainties surrounding the baseline inflation path, including the revised formula for MSP for kharif crops, the staggered impact of HRA revisions by states and fiscal slippage, which could adversely impact the outlook on inflation.
The RBI lowered the retail inflation target for the first half of current fiscal to 4.7-5.1 per cent from its earlier projection of 5.1-5.6 per cent on sharp moderation in food price rise and likelihood of a normal monsoon.
The RBI, in a statement, also added that several factors are expected to accelerate the pace of economic activity in 2018-19. "First, there are now clearer signs of revival in investment activity as reflected in the sustained expansion in capital goods production and still rising imports, albeit at a slower pace than in January. Second, global demand has been improving, which should encourage exports and boost fresh investment. On the whole, the GDP growth is projected to strengthen from 6.6 per cent in 2017-18 to 7.4 per cent in 2018-19."
The RBI also expects India's economic growth rate to strengthen to 7.4 per cent in the current fiscal from 6.6 per cent in 2017-18 on account of revival in investment activity.
Earlier reports also suggested the Monetary Policy Committee (MPC) is unlikely to yield to the India Inc's pressure for a benign monetary policy stance by keeping policy rates unchanged against the backdrop of hardening global crude oil prices. "We expect the policy guidance and tone to be balanced and similar to that in February," A Prasanna, chief economist at ICICI Securities Primary Dealership, told Reuters.
In its February policy review meeting, the MPC had kept repo rate unchanged at 6 per cent, and the reverse repo rate under the LAF (liquidity adjustment facility) at 5.75 per cent.
The MPC voted 5-1 in favour of the status quo on the repo rate. The MPC's Michael Debabrata Patra, however, voted for an increase in the policy rate of 25 basis points. The MPC projected inflation in Q4 2017-18 to be 4.5 per cent considering a sharp decline in vegetable prices and significant moderation in fuel group inflation in first three months of 2018.
The repo rate is the rate at which the central bank lends short-term money to other banks, while the reverse repo rate is a tool used by the central bank to control inflation.