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RBI Keeps Repo Rate Unchanged, Downgrades Growth Forecast To 6.7%

Five members of the RBI's monetary policy committee voted today to keep rates unchanged, with one voting for at least a 25 bps cut. The RBI also kept the reverse repo rate unchanged at 5.75 per cent.

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RBI Keeps Repo Rate Unchanged, Downgrades Growth Forecast To 6.7%

Highlights

  1. Repo rate kept unchanged at 6%, a near seven-year low
  2. RBI cut growth forecast for financial year 2017-18
  3. India Inc had called for sharp cut in interest rate
The Reserve Bank of India (RBI) kept its policy rate unchanged at a near seven-year low of 6 per cent on Wednesday, despite a sharp slowdown in economic growth, after a surge in consumer inflation to a five-month high. The central bank has also cut its growth forecast for the year. "The projection of real GVA growth for 2017-18 has been revised down to 6.7 per cent from the August 2017 projection of 7.3 per cent," the RBI said in a statement.

However, the RBI cut the Statutory Liquidity Ratio (SLR) requirement for banks by 50 basis points to 20 per cent from 19.50 per cent, a move which was cheered by the stock markets as it will give more resources to banks to lend. It is estimated to free up Rs 57,000 crore for lending by banks.SLR is the percentage of total deposit that banks are required to hold with them in the form of gold, government approved securities before extending credit to their customers.

All but three of 60 analysts polled by Reuters had expected the RBI to keep the repo rate steady. India Inc had called for a sharp cut in interest rate for boosting the economic growth rate.

Five members of the RBI's monetary policy committee voted today to keep rates unchanged, with one voting for at least a 25 bps cut. The RBI also kept the reverse repo rate unchanged at 5.75 per cent.

At its previous meeting in August, the RBI had lowered the repo rate by 25 basis points to a seven-year low of 6 per cent. It had then projected gross value added (GVA) growth of 7.3 per cent for 2017-18, which it revised downward to 6.7 per cent today. GVA is a measurement of economic growth which strips away the effects of taxes and subsidies.

The monetary policy committee also noted the short-term impact of GST on the economy. "The implementation of the GST so far also appears to have had an adverse impact, rendering prospects for the manufacturing sector uncertain in the short term. This may further delay the revival of investment activity, which is already hampered by stressed balance sheets of banks and corporates," the RBI's policy statement said.

The RBI is however optimistic of economic growth recovering in the second half (H2) of this fiscal year. "Teething problems linked to the GST and bandwidth constraints may get resolved relatively soon, allowing growth to accelerate in H2," the statement added.

Consumer inflation had surged to a five-month high of 3.36 per cent in August, threatening the central bank's target. The RBI has made a priority of maintaining consumer inflation at around 4 per cent - the midpoint of its mandated target of 2 to 6 per cent. Worryingly, core inflation - which excludes energy and food - has remained even higher, reaching 4.6 per cent in August amid stubbornly high prices in key areas such as health and education.

Apart from inflation concerns, the prospect of the Federal Reserve gearing up to start unwinding some of its massive monetary stimulus later this year also kept the RBI cautious, analysts say. Economists don't expect the RBI to cut interest rate anytime soon. "I think inflation is inching up a little and with the US also tightening liquidity, the probability for a rate cut, is very low. A maximum of 25 bps is possible, if US says they won't crunch liquidity anymore," said Samrat Dasgupta, CEO of Esquire Capital.

The monetary policy committee also noted the upside risks to inflation. "There has been a broad-based increase in CPI inflation excluding food and fuel. International crude prices, which had started rising from early July, have firmed up further in September," the statement said. The RBI expects inflation to rise from its current level and range between 4.2 per cent and 4.6 per cent in the second half of this year, including the house rent allowance (HRA) by the central government.

(With agency inputs)

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