Thursday, 5 October 2017

RBI Presses Pause Button; Lowers Growth Forecast

Citing upside risks to inflation, the central bank has refrained from changing key lending rates and maintained a neutral stance, suggesting that any further rate cuts are not a given.

The Reserve Bank of India's monetary policy committee (MPC) in its fourth Bi-monthly policy review kept the key repo rate unchanged at 6.00 per cent and the reverse repo rate unchanged at 5.75 per cent. However, the statutory liquidity ratio (SLR) was cut by 50 basis points to 19.5 per cent, effective fortnight starting October 14.

The MPC observed that retail inflation has risen by around two percentage points since its last meeting in August amid an escalation of global geopolitical uncertainty and heightened volatility in financial markets. RBI expects inflation to surge from its current level and range between 4.2-4.6 per cent in the second half of this year.

Going forward, the central bank has revised its gross value-added (GVA) growth forecast to 6.7 per cent for the current fiscal year from 7.3 per cent earlier. RBI said the loss of momentum in Q1 of 2017-18 and the first advance estimates of kharif food grains production are early setbacks that impart a downside to the outlook. The central bank noted goods and service tax implementation seems to have an adverse impact as it made prospects of the manufacturing sector uncertain which may further delay investment revival.

As economic growth has been slowing for five quarters, the pressure is building on the government to announce a stimulus package to spur growth. India’s real or inflation-adjusted gross domestic product grew 5.7 percent in April-June, the slowest in 13 quarters. RBI suggests that for improving economic growth, deleveraging of balance sheets and recapitalisation of banks was essential.

The central bank will continue to watch the inflation trajectory for months before taking a call on the next rate cut which can only happen if growth drops much below its annual projection. Even a drop in the second quarter may not move the central bank to act as it may like to wait and watch at least till the December quarter growth figures are out.

Latin Manharlal Group

1 comment: