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
