RBI retains growth at 6.7%, ups inflation projection upto 4.7%
The Reserve Bank of India (RBI) on Wednesday left the key policy rate unchanged as it raised the inflation projection marginally upto 4.7 per cent at the upper end by March, while retaining growth estimates at 6.7 per cent for the current fiscal.
The 6-member Monetary Policy Committee (MPC), which in a 5:1 vote chose status-quo on rates and kept a neutral stance, reiterated its commitment to keep retail inflation within the target of 4 per cent plus or minus 200 bps, while supporting growth.
The RBI has increased its inflation projection by 10 basis points (bps) to 4.3-4.7 per cent in the second and the fourth quarters, from 4.2-4.6 per cent estimated in the October review. “The change in our inflation stance is very small. It is 10 bps compared to the October policy,” RBI Governor Urjit Patel, who heads the MPC, told reporters after the policy review meeting in Mumbai.
“In arriving at the decision, the MPC took note of the upside pressures from food and fuel prices on the cost of living condition and inflation expectations. Our surveys indicate that corporates are also struggling with rising input costs and higher risks of pass-through to retail prices in the near-term,” he said.
“The MPC also expressed concerns about the implications for its inflation outlook arising from a possible fiscal slippage and global financial instability heightening asset price volatility,” he added.
The panel, however, expects the usual seasonal moderation in food prices and recent lowering of tax rates by the GST Council to mitigate some pressures, Patel said.
With the RBI’s move, the stock markets suffered for the second straight session on Wednesday after it kept interest rates on hold but raised the inflation forecast, dashing medium term rate cut hopes and sparking a sell-off in banking stocks.
Benchmark Sensex slumped 205 points to end at 32,597.18, while the broader Nifty finished at 10,044.10, down 74.15 points.
On the other hand, India Inc expressed disappointment over RBI’s decision, while bankers have welcomed it, terming the RBI policy pragmatic, and saying the policy stance reflects the ground reality well as it balances out the higher likely growth with a marginal uptick in inflation as well.
The decision to leave the repo rate unchanged at 6 per cent was supported by five MPC members, with government nominee Ravindra H Dholakia voting for a 25 bps rate cut. Patel said the MPC continued with its neutral stance and will watch the incoming data on inflation and growth carefully. “The neutral policy stance is there for a reason that the whole possibilities are on the table and we would look carefully look at both the inflation and growth data that will come in the coming months,” he said.
The RBI retained its economic growth outlook at 6.7 per cent as announced in the October policy. Patel said the MPC decision was also conditioned by the recent developments that augur well for growth prospects going forward. He added that in the primary capital market, resource mobilisation has increased significantly which will add to the demand in the short-run and boost the growth potential over the medium-term.
Patel, however, said the hectic activity in the primary share issuances, recent reform measures by the Government, a climb-up in the ease of doing business ranking by the World Bank, recapitalisation of state-run banks and efforts to resolve the issue of bad assets under the provisions of the insolvency code bode well for the economy in the short to medium-term.
“A healthy IPO market will add to demand for credit in the short-run and boost the growth potential in the medium-term, ease of doing business rankings will help attract foreign direct investment and bank recapitalisation will help enhance allocative efficiency of resources,” he said.
“In the view of MPC, all these factors should help to create conducive financial conditions for nurturing higher growth,” Patel added.
Pegging a 6.7 per cent growth on a gross value-added basis, with risks evenly balanced, RBI Executive Director Michael Patra said, “It is going to be 7 and 7.8 per cent in the third and fourth quarters, respectively. So, we are on an uptick from now.”
Patel said the latest bank credit data suggests that there is already an uptick. “As the economy picks up, the demand for credit will go up. There is enough supply to ensure that lack of credit is not on the way in supporting higher growth,” he said.
RBI Deputy Governor Viral Acharya said liquidity conditions have continued to normalise gradually during the year. “The overhang of liquidity surplus in the system after the note-ban last November, which had touched a peak of close to Rs 7.96 trillion (Rs 7.96 lakh crore) at the beginning of the year, has since come down,” he said.
Banking system liquidity has been moving towards neutrality as the currency in circulation has expanded by Rs 7.6 trillion during January 6 to November 24, 2017. “It is expected that the liquidity condition would be marginally still in surplus by March 2018. Given the trends in currency in circulation, it is expected that liquidity may reach neutrality in the first half of 2018," Acharya said.
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