Monetary Policy Panel Keeps Rates On Hold Citing Inflation Risks

5 of 6 MPC members voted for a status quo on rates. Exec director at RBI, voted in favour of a 25-basis-point hike.

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(Photo: Reuters)

India’s Monetary Policy Committee on Wednesday kept interest rates unchanged and maintained a neutral stance, even as it raised its inflation forecasts and reiterated a commitment to maintaining the headline inflation at close to 4 percent.

The MPC, however, highlighted a number of upside risks to inflation, suggesting that a rate hike in the next financial year is now a real possibility. Five of the six MPC members voted for a status quo on rates. Michael Patra, executive director at the Reserve Bank of India, voted in favour of a 25-basis-point hike.

• Following the review, the benchmark repo rate remains at 6 percent.
• The reverse repo rate will be held at 5.75 percent.

The decision was in line with market expectations. All but one of the 33 economists polled by Bloomberg News expected a status quo on rates.

RBI’s rate cut trajectory.

MPC On Inflation

The MPC said it expects consumer inflation to average 5.1 percent in the final quarter of 2017-18. For the next financial year, it expects the inflation to range 5.1-5.6 percent in the first half, declining to 4.5-4.6 percent in the second. Over the medium term, the MPC is tasked with maintaining inflation in a band of 4 (+/- 2) percent. It reiterated this commitment today.

The committee highlighted six upside risks to inflation:

• The staggered impact of HRA increases.
• Higher commodity prices due to strong global growth.
• Revised guidelines for minimum support prices of kharif crops.
• An increase in customs duty on a number of items.
• Impact of fiscal slippage on inflation.
• Normalisation of global monetary policy.

“….There is, therefore, need for vigilance around the evolving inflation scenario in the coming months,” the MPC concluded. It also highlighted the mitigating factors for inflation.

First, capacity utilisation remains subdued. Second, oil prices have moved both ways in the recent period and can potentially soften from current levels based on production response. Third, rural real wage growth is moderate. 

MPC Statement 

MPC On Fiscal Pressure

The MPC took a hard line on the government’s fiscal stance and its decision to delay the fiscal consolidation process.

….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. 

MPC statement

While announcing the annual Union Budget on 1 February, the government said the fiscal deficit for 2017-18 would settle at 3.5 percent. This is higher than the targeted 3.2 percent. For 2018-19, the government is targeting a fiscal deficit of 3.3 percent and gross borrowings of Rs 6 lakh crore.

The wider-than-expected fiscal deficit target and concerns over high borrowings have led to a rise in bond market yields.

MPC On Growth

Growth, meanwhile, is recovering as expected.

According to the MPC, GVA growth of 6.6 percent is expected this year. Next fiscal year, growth is expected to rise to 7.2 percent. According to the MPC, there are early signs of revival in investment activity as reflected in the pick-up in credit growth. Stability in the GST framework, the recapitalisation of public sector banks and the insolvency proceedings underway in large cases are also expected to aid growth.

The Economic Survey presented ahead of the Budget pegged growth for 2017-18 at 6.75 percent – in line with the RBI’s estimate. The full-year growth forecast suggests a significant pick-up in the third and fourth quarters of 2017-18.

RBI On Liquidity

The objective of the liquidity operations conducted by the RBI is not to manage the price of any long-term assets, but to meet the liquidity needs of the economy in line with the stated stance of monetary policy, Deputy Governor Viral Acharya said during the press conference after the central bank’s monetary policy meeting.

Except in rare, extraordinary, economy wide circumstances, the goal of the RBI’s liquidity operations is not to manage directly the prices of any particular long term asset market. 

Viral Acharya, Deputy Governor, RBI 

Watch BloombergQuint’s coverage of the monetary policy committee’s decision here.

(This article was originally published on BloombergQuint.)