Published On : Wed, Oct 4th, 2017

RBI leaves repo rate unchanged at 6%; cuts GVA growth estimate to 6.7%


New Delhi: The six-member Monetary Policy Committee (MPC) of Reserve Bank of India, headed by Governor Urjit Patel, on Wednesday left the short-term lending rate, also known as repo rate, unchanged at 6 per cent.

The committee also did not tweak the cash reserve ratio (CRR), which remained unchanged at 4 per cent, but cut statutory liquidity ratio (SLR) requirement by 50 basis points to 19.5 per cent.

The projection of real GVA growth for 2017-18 has been revised downward to 6.7 per cent from an August 2017 projection of 7.3 per cent, with risks evenly balanced.

Within seconds of the announcement, the benchmark equity indices pared morning gains even though the outcome was in line with the consensus view.

“The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of 2 per cent, while supporting growth,” the central bank said in its policy statement.

Dr Chetan Ghate, Dr Pami Dua, Dr Michael Debabrata Patra, Dr Viral V. Acharya and Dr Urjit R Patel voted in favour of the monetary policy decision, while Dr Ravindra H Dholakia voted for a policy rate reduction of at least 25 basis points.

Since the MPC’s meeting in August 2017, global economic activity has strengthened further and become broad-based. Recent hurricanes could, however, weigh on global economic activity in the near term, the RBI statement said.

On the domestic front, real gross value added (GVA) growth slowed significantly in Q1 of 2017-18, cushioned partly by extensive frontloading of expenditure by the central government. GVA growth in agriculture and allied activities slackened quarter-on-quarter in the usual first quarter moderation, partly reflecting deceleration in the growth of livestock products, forestry and fisheries.

There are factors that continue to impart upside risks to this baseline inflation trajectory, RBI said.

Advance estimates of kharif foodgrains production are early setbacks that impart a downside to the outlook. The implementation of the GST so far appears to have had an adverse impact, rendering prospects for the manufacturing sector uncertain in the short term, it said.

Advance estimates of kharif foodgrains production are early setbacks that impart a downside to the outlook. The implementation of the GST so far appears to have had an adverse impact, rendering prospects for the manufacturing sector uncertain in the short term, it said.

RBI is beset with an entirely new set of problems now – inflation is raising its ugly head again, the foundation of the economy looks shaken, FIIs are fleeing the country and the rupee is tumbling.

The domestic currency hit a low of 68.86 to the dollar in November 2016 on the government’s surprise note ban, but bounced back to trade in the 64-66 range only to slip again in last one month.

The country’s GDP growth slipped to 5.7 per cent in June quarter from 7.3 per cent in September quarter last year. Projections for earnings revival have been deferred further and growth estimates have been downgraded multiple times.

All of that had many clamouring for a rate cut. But the macro environment has become challenging.

India’s fiscal deficit hit 96 per cent of the FY18 budget estimate by the end of August, as the government kept its foot on the spending pedal to support the economy. The CAD widened to a four-year high of $14.3 billion, or 2.4 per cent of GDP (annualised), in June quarter of 2017. If crude prices were to see a major spike and gold imports showed strong growth this festive season, the CAD situation may quickly slip out of control.

Ever since the Fed has hinted at a December rate hike, the dollar has been on a rise. The dollar index, which had been falling since January, has been on a rebound and the rupee has seen a few days of sharp correction against the greenback.

The outlook remains negative as the US dollar is also riding on Trump’s tax plan. A rise in dollar could translate to higher imported inflation, analysts said.

Meanwhile, crude prices hit a high of $59.49 last week. India imports a majority of its crude requirement and a weak rupee could mean more import bill.

The minutes of the MPC’s meeting will be published by October 18, 2017.