RBI Maintains Status Quo as Inflation Risks Rise

India's central bank has refrained from tinkering with the key lending rates, opting to wait for more clarity on the uncertain inflation landscape and on how a radical crackdown on black money is affecting economic growth.

The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) kept its benchmark repo rate (the rate at which banks borrow short-term funds from the central bank) unchanged at 6.25 per cent, during its third bi-monthly monetary policy review -the sixth and the final one for the fiscal 2016-17.

The monetary policy announcement marked a key shift in the central banks’ stance. The MPC decided to change its position from accommodative to neutral in order to assess the transitory effects of demonetisation on inflation and output gap (the gap between actual economic growth and potential economic growth).

The change in stance essentially marks an end to a period in which the central bank slashed interest rates by a total of 175 bps from January 2015 to October 2016, starting with previous Governor RaghuramRajan and continuing under Urjit Patel.

The central bank also lowered its economic growth forecast for 2016-17 to 6.9 per cent from the 7.1 per cent it had forecast in its fifth bi-monthly policy in December. Before the demonetisation exercise, RBI was expecting the economy to grow at 7.6 per cent.

Retail inflation, the RBI’s benchmark gauge for prices, decelerated to a two-year low of 3.41 per cent in December, but RBI seems more focused on non-food, non-fuel inflation. With this move, the RBI hints that it will now keep its eyes on the inflation target of 4 per cent.

The monetary policy committee further highlighted concerns around the global policy environment, impact of rising global commodity prices and strengthening of the dollar among others.

At the same time, the central bank is expecting a recovery in economic growth in the coming financial year, albeit its gross value added projections show only a 50-basis point rise to 7.4 per cent in 2017-18.

Latin Manharlal Group