The monetary policy committee today kept the benchmark repo rate unchanged at 6.50 percent
The Reserve Bank of India (RBI) Monetary Policy Committee (MPC) on December 5 cut H2FY19 inflation forecast to 2.7-3.2 percent from 3.9-4.5 percent earlier. It pegged H1 FY20 inflation at 3.8-4.2 percent.
In a post-policy media briefing, RBI Governor Urjit Patel said, “retreat in energy prices has led to a decline in inflation.”
The MPC kept the repo rate unchanged at 6.50 percent and retained the stance of calibrated tightening of monetary policy in line with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 percent within a band of plus or minus 2 percent.
India’s retail inflation for October cooled off to 3.31 percent from 3.7 percent in September and lower than the RBI's and the government’s comfort zone of 4 percent (+/- 2 percent), for the medium term.
In its policy document, the MPC listed out the following key factors that affected the inflation forecast:
- There have been several important developments since the October policy which will have a bearing on the inflation outlook. Despite a significant scaling down of inflation projections in the October policy primarily due to moderation in food inflation, subsequent readings have continued to surprise on the downside with the food group slipping into deflation. The broad-based weakening of food prices imparts a downward bias to the headline inflation trajectory, going forward.
- Secondly, in contrast to the food group, there has been a broad-based increase in inflation in non-food groups.
- Thirdly, international crude oil prices have declined sharply since the last policy; the price of Indian crude basket collapsed to below $60 a barrel by end-November after touching $85 a barrel in early October. However, selling prices, as reported by firms polled in the Reserve Bank’s latest IOS, are expected to edge up further in Q4 on the back of increased demand.
- Fourthly, global financial markets have continued to be volatile with EME currencies showing a somewhat appreciating bias in the last one month.
- Finally, the effect of the 7th Central Pay Commission’s HRA increase has continued to wane along expected lines.
However, the MPC also noted although recent food inflation numbers have surprised on the downside and prices of petroleum products have softened considerably, it is important to monitor closely watch the trajectory due to short-term uncertainties.
The repo rate has been hiked twice so far this year -- in June by 25 basis points and in August by an equal measure. The last time it was hike before that was in January 2014, when it was increased by 25 bps to 8.00 percent. Since then, it has either been cut or kept as is.One basis point is a hundredth of a percentage point.