The Reserve Bank on Wednesday kept interest rate unchanged as was widely expected in view of upward trend in inflation even as it cut the growth forecast to 6.7 per cent for the current fiscal. Consequently, the repo rate, at which it lends to banks, will stand at 6 per cent. The reverse repo, at which RBI borrows from banks will continue to be at 5.75 per cent, it said at the fourth bi-monthly policy review.
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 6 years.
"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," RBI said in its fourth policy review of 2017-18.
The six-member monetary policy committee voted 5:1 for the decision, with only Ravindra Dholakia voting for a 0.25 per cent reduction in rates. The Reserve Bank of India (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 (Monetary Policy Committee) 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 (GVA) 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 foodgrains 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," 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. Markets were expecting the Monetary Policy Committee to vote for a status quo on the rates at the policy announcement. They also felt that with inflation rising, the RBI is at the end of its rate cutting cycle and may cut it once at best during the remainder of the fiscal. The review comes amid a heightened fears of a slowdown in growth due to various factors like the demonetisation exercise and the introduction of the indirect taxation reform GST and a shrill call for fiscal boosters from a varied section of economists.
The GDP expansion slowed down for the sixth straight quarter to 5.7 per cent which is a three year low under the new series of computation for the June quarter. However, data released on Tuesday said the core sector growth came at a 5- month high of 4.9 per cent for August, up from 2.9 per cent for July.
The government has been working on a plan to push up growth, but has not announced any move yet. It cut the excise duty on fuels by Rs 2 in order to minimise the impact of increasing global fuel prices on domestic consumers, a move which heightens the risk of a fiscal slippage.
Breaching the fiscal deficit is also seen as stoking inflation, the Reserve Bank’s primary objective. The RBI is mandated to keep the headline inflation, which accelerated to 3.36 per cent for August, in the 4-6 per cent band. Some analysts have been saying inflation has been off the lows and will be pushing up in the second half of the fiscal.
The central bank said it is imperative to reinvigorate investment activity which, in turn, would revive the demand for bank credit by industry as existing capacities get utilised and the requirements of new capacity open up to be financed.
"Recapitalising public sector banks adequately will ensure that credit flows to the productive sectors are not impeded and growth impulses not restrained," it said.