Ignoring demands from the industry and the Centre, the Reserve Bank of India on Wednesday kept the interest rate unchanged on concerns over the rising inflationary trend in the economy and lowered growth forecast from 7.3 per cent to 6.7 per cent for the current fiscal. The Central bank also cautioned the Government against any stimulus package to revive the economy saying it could adversely impact long-term macroeconomic stability.
The six-member Monetary Policy Committee (MPC) of the RBI voted 5:1 for the decision, with only Ravindra Dholakia voting for a 0.25 per cent reduction in rates.
The RBI has taken note of rising inflation, falling growth, adverse impact of the Goods and Services Tax (GST), and decline in Kharif crop production to keep the rate unchanged.
While the repo rate, at which the RBI lends to banks, will stand at 6 per cent, the reverse repo, at which the RBI borrows from banks, will continue to be at 5.75 per cent.
In its last review in August, it had slashed the benchmark lending rate by 0.25 percentage points to 6 per cent, the lowest in six years.
In its fourth bi-monthly policy review, the RBI said, “The decision of the Monetary Policy Committee is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for the Consumer Price Index inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth,” the RBI said.
The RBI said that after a record low in June, inflation is trending up and estimated the headline number to touch 4.6 per cent by the March quarter.
“The MPC decided to keep the policy stance neutral and monitor incoming data closely. The MPC remains committed to keeping headline inflation close to 4 per cent on a durable basis,” it said.
On growth, it cut its 2017-18 forecast by Gross Value Added basis to 6.7 per cent from 7.3 per cent earlier.
“The loss of momentum in Q1 of 2017-18 and the first advance estimates of Kharif grain production are early setbacks that impart a downside to the outlook. 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,” the RBI said.
The MPC said structural reforms introduced in the recent period will likely be growth augmenting over the medium to long-term, by improving the business environment, enhancing transparency and increasing formalisation of the economy.
Calling for recapitalisation of PSU banks, the RBI said, “It adequately will ensure that credit flows to the productive sectors are not impeded and growth impulses not restrained.”
While India’s retail inflation swelled to a five-month high of 3.36 per cent in August on the back of costlier vegetables and fruits, the first advance estimates for Kharif production pose some uncertainties. Also, there are some price revisions pending the implementation of GST taking place, the RBI said.
There has been an increase in CPI inflation excluding food and fuel; and international crude prices which started rising from July, have firmed up further in September, it said.
“Taking into account these factors, inflation is expected to rise from its current level and range between 4.2-4.6 per cent in the second half of this year, including the House Rent Allowance by the Centre,” said the policy statement.
The RBI said there are factors that continue to impart upside risks to this baseline inflation trajectory. Farm loan waivers by States and States’ implementation of salary and allowances are among these factors.
“...An increase of (salary by) States similar to that by the Centre could push up headline inflation by about 100 basis points above the baseline over 18-24 months,” RBI said.
However adequate food stocks and effective supply management by the Government may keep food inflation more benign than assumed in the baseline, it said further.
Cautioning the Government against a stimulus package, the RBI contended that breaching the fiscal deficit target will fire up inflation and hurt long-term macroeconomic stability.
It pointed out that farm loan waivers combined with a potential stimulus which the Government is mulling now, can result in a 1 percentage point slippage in fiscal deficit, which is pegged at 3.2 per cent for 2017-18.
“Such a slippage can stoke inflation by 0.50 per cent on a permanent basis,” the RBI warned.