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Reserve Bank Of India (RBI) Policy: Why RBI Kept Policy Rates On Hold

Worries over fiscal slippage, revised formula for MSP, HRA revisions, crude oil prices weighed heavily on RBI's decision of keeping the rates steady

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Reserve Bank Of India (RBI) Policy: Why RBI Kept Policy Rates On Hold

RBI kept the key interest rates steady in the monetary policy review meet on Thursday


Despite inflation declining to 4.4 per cent in February due to fall in inflation in food and fuel, the Reserve Bank of India (RBI) refrained from slashing the key policy rate (repo rate) below the existing 6 per cent in the policy review meeting on Thursday. The monetary policy committee (MPC) of the RBI noted that there are several uncertainties surrounding the baseline inflation path. In the press conference that happened after the release of the policy, one journalist asked RBI Governor Urjit Patel about the reason for staying pat despite falling inflation. To this, Governor Patel replied, "Inflation print for February is less than expected because of the seasoning softening of vegetables. However, the MPC noted that there are uncertainties such as fiscal slippage of budget. There is an uncertainty as to volatility in crude oil in the near term outlook. This is why we have gone by status quo." 

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The RBI maintained the neutral stance of monetary policy owing to the following factors:

1. Kharif crops: The revised formula for MSP (minimum support price) as announced in the Union Budget 2018-19 for kharif crops may have an impact on inflation, although the exact magnitude will be known only in the coming months, said the RBI policy statement.

2. HRA revisions: The staggered impact of HRA revisions by various state governments may push headline inflation up, RBI said. House Rent Allowance (HRA) is an amount paid by employers to employees as part of their salaries. While the statistical impact of HRA revisions will be looked through, there is a need to watch out for any second round effects, according to the statement.

3. Fiscal Slippage of budget: In case there is any further fiscal slippage from the Union Budget estimates for 2018-19 or the medium-term path, it could adversely impact the outlook on inflation, said RBI. There are also risks to inflation from fiscal slippages at the level of states on account of higher committed revenue expenditure.

4. Worries over monsoon: Should the monsoon turn deficient temporally and/or spatially, it may have a significant bearing on food inflation.

5. Industrial cost: Firms polled in the Reserve Bank's Industrial Outlook Survey expect input and output prices to rise, going forward.

6. Crude oil: Recent volatility in crude prices has imparted considerable uncertainty to the near-term outlook.

Against the above backdrop, the MPC decided to keep the policy repo rate on hold and continue with the neutral stance.

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