RBI Monetary Policy: MPC maintains status quo; repo rate unchanged at 6%

Gaurav Choudhury and Beena Parmar
Moneycontrol News

The Reserve Bank of India (RBI) on Wednesday kept its key lending rate—the repo rate—unchanged at 6 percent, but warned about lurking inflation worries in the new year, amid signs that costlier fuel prices could pinch household budgets.

The six member monetary policy committee (MPC), headed by RBI governor Urjit Patel, ignored calls from business leaders to cut interest rates to boost investment and accelerate growth in the broader economy that has shown signs of revival in the last few months.

The MPC felt that India’s retail inflation, which was galloping towards the RBI’s tolerable 4 percent threshold driven by costlier vegetables, need to be firmly bottled up first before lowering loan costs. “The MPC remains committed to keeping headline inflation close to 4 percent on a durable basis,” the RBI said in its monetary policy statement.

“The moderation in inflation excluding food and fuel observed in Q1 (April-June) of 2017-18 has, by and large, reversed,” the RBI said in its monetary policy statement. “There is a risk that this upward trajectory may continue in the near-term”.

The RBI marginally raised its retail inflation forecast for the second half of the fiscal year (October-March) to range between 4.3 and 4.7 percent, from the earlier estimates of 4.2-4.6 percent.

India’s retail inflation has been galloping towards the RBI’s tolerable 4 percent threshold driven by costlier vegetables.

Retail or consumer price inflation, the main price gauge that the central bank tracks for interest rate related decisions, was 3.58 percent in October.

Surging onion prices, which is currently retailing around Rs 65 a kg in some markets, has pushed up kitchen budgets. Unseasonal rains have affected supplies of the summer-sown (kharif) onion crop this year, pushing up retail prices. Last month the government allowed state-owned agencies to buy onions from overseas markets, to bolster local supplies and keep a check on shop-end prices of the commonly-used bulb in most Indian curries.

Tomato, another widely consumed vegetable across the country, has also turned costly, due to supply disruptions in Karnataka, a leading catchment production area of the pulpy vegetable.

The central bank, however, said that the fresh winter crop’s arrival in markets will likely cool vegetable prices. This, along with the Goods and Services Tax (GST) Council’s decision to cut rates on more than 200 items last month, will likely help keep overall inflation levels within manageable limits.

“Despite recent increase in prices of vegetables, some seasonal moderation is expected in near months as winter arrivals kick in. Prices of pulses have continued to show a downward bias,” it said.

The RBI also kept one eye on global oil prices that has nudged higher, following last week's deal between Organisation of Petroleum Exporting Countries (OPEC) and other crude producers to curb production by 1.8 million barrels per day (bpd) until the end of 2018. This will likely drive up prices.

This could knock up pump-gate diesel and petrol prices in India, which imports more than two-thirds of its crude oil requirements.

“The recent rise in international crude oil prices may sustain, especially on account of the OPEC’s decision to maintain production cuts through next year,” the RBI said.

“In such a scenario, any adverse supply shock due to geo-political developments could push up prices even further,” the central bank said.

Higher house rent allowances (HRA) for millions of government employees that are being paid in a staggered manner will also keep inflation high, the RBI said.

“The impact of HRA by the Central Government is expected to peak in December. The staggered impact of HRA increases by various state governments may push up housing inflation further in 2018, with attendant second order effects,” it said.

The status quo on repo rate—the rate at which banks borrow from the RBI—dashed hopes further lowering of borrowing costs for households and the companies. The RBI last cut the repo rate by 0.25 percentage points to 6 percent in August.

The RBI also retained its economy’s growth forecasts for 2017-18, despite signs of revival in consumption spending and investment activity. The central bank expects the gross value added (GVA) to grow at 6.7 percent in 2017-18.

The Indian economy grew 6.3 percent in July-September, recovering from a three-year low growth slump of 5.7 percent in April-June, as companies scaled up production and restocked supplies after goods and services tax (GST) kicked in from July 1.

Data released last month showed that the GST-induced supply shock may have eased considerably, helping a rebound in the broader economy.

Gross value added (GVA), which is GDP minus taxes, grew 6.1 percent, mirroring greater production activity in factories, according to data released by Central Statistics Office (CSO). GVA growth had significantly fallen in the last few quarters, slipping to 5.6 percent in April-June.

In the MPC’s assessment, there have been several significant developments in the recent period which augur well for growth prospects.

There has been jump in funds raise from the primary capital market, after several years of sluggish activity. As the capital raised is deployed to set up new projects, it will add to demand in the short run and boost the growth potential of the economy over the medium-term.

India has leapfrogged into the 100th rank in the World Bank's Ease of Doing Business rankings, jumping 30 notches from last year, which the RBI believes should help “sustain foreign direct investment in the economy”.

The government’s efforts to clean up banks’ balance sheets snowed under a mount of bad loans through the insolvency and bankruptcy code (IBC) and public sector bank recapitalisation should also enhance allocative efficiency, the RBI said.

The string of farm loan waivers by state governments, a partial roll back of local levies on petroleum products and lower-than-expected GST revenue collections, however, could result in fiscal slippages with a bearing on the overall inflation rate.

Among the MPC members, Chetan Ghate, Pami Dua, Michael Debabrata Patra, Viral V. Acharya and Urjit Patel favoured an unchanged repo rate, while Ravindra Dholakia voted for a 0.25 percentage point rate cut.