RBI Keeps Interest Rate Unchanged, Raises Inflation Forecast

With inflation trajectory likely to remain upward in the coming months, many analysts see a prolonged pause from RBI.

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RBI Keeps Interest Rate Unchanged, Raises Inflation Forecast

The monetary policy committee decided 5-1 in favour of keeping the repo steady.

The monetary policy committee of Reserve Bank of India (RBI), as widely expected, kept repo or key lending rate unchanged at 6 per cent amid inflation concerns. The central bank reiterated that it is maintaining a "neutral" stance in monetary policy. Five members of the monetary policy committee voted to keep rates unchanged, with one voting for a 25-basis-point cut. The RBI kept its growth forecast for the current fiscal year ending March 31 unchanged at 6.7 per cent. RBI however raised inflation forecast to 4.3-4.7 per cent in third and fourth quarters of current fiscal.

The October bi-monthly statement projected inflation to rise and range between 4.2-4.6 per cent in the second half of this year.

The RBI pointed to several factors that could push inflation higher. "Moderation in inflation excluding food and fuel observed in Q1 of 2017-18 has, by and large, reversed. There is a risk that this upward trajectory may continue in the near-term. Second, the impact of HRA by the Central Government is expected to peak in December," the RBI said.

The central bank also said that the "recent rise in international crude oil prices may sustain, especially on account of the OPEC's decision to maintain production cuts through next year. In such a scenario, any adverse supply shock due to geo-political developments could push up prices even further."

RBI also expressed concern over risk of fiscal slippage. "Implementation of farm loan waivers by select states, partial roll back of excise duty and VAT in the case of petroleum products, and decrease in revenue on account of reduction in GST rates for several goods and services may result in fiscal slippage with attendant implications for inflation," the RBI said.

The government reported a fiscal deficit of Rs 5.25 lakh crore for April-October, or 96.1 per cent of the budgeted target for the current fiscal year that ends in March 2018. The deficit was 79.3 per cent of the full-year target during the same period a year ago.

With inflation trajectory likely to remain upward in the coming months, many analysts see a prolonged pause from RBI.

Suvodeep Rakshit, senior economist at Kotak Institutional Equities, said: "It is unlikely that the RBI will move in the February policy too, given the inflation trajectory which is likely to peak in June 2018. Further, global policy rate cycle and commodity prices along with consolidated fiscal position will keep the RBI cautious. However, incoming data versus the RBI's projections will remain key."

"We maintain our call that the RBI will be on a pause in the near term," he said. 

The next meeting of the monetary policy committee is scheduled on February 6 and 7, 2018. (With Agency Inputs)

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