In line with market expectations, the Reserve Bank of India increased its key policy rate, the repo rate by 25 basis points to 6.5 per cent, in its third bi-monthly meeting for the fiscal.
This is the second consecutive hike. The policy stance has, however, been retained as neutral. Consequently, the reverse repo rate under the LAF stands adjusted to 6.25 per cent, and the marginal standing facility rate and the Bank Rate to 6.75 per cent, RBI Governor Urjit Patel informed.
The decision of MPC is consistent with the neutral stance of monetary policy, in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of four per cent, within a band of +/- 2 per cent, while supporting growth.
RBI said various indicators suggest economic activity continued to be strong. "The progress of the monsoon so far and a sharper than the usual increase in MSPs of kharif crops are expected to boost rural demand by raising farmers’ income. Robust corporate earnings, especially of fast moving consumer goods (FMCG) companies, also reflect buoyant rural demand. Investment activity remains firm even as there has been some tightening of financing conditions in the recent period," the policy statement said.
The MPC has retained GDP growth projection for 2018-19 at 7.4 per cent. Inflation is projected at 4.6 per cent in Q2, 4.8 per cent in H2 of 2018-19 and 5.0 per cent in Q1 of 2019-20. Excluding the HRA impact, CPI inflation is projected at 4.4 per cent in Q2, 4.7-4.8 per cent in H2 and 5.0 per cent in Q1 of 2019-20.
Even as inflation projections for second quarter have been revised marginally downwards vis-à-vis the June statement, projections for the third quarter onwards remain broadly unchanged. "Rising trade tensions may, however, have an adverse impact on India's exports. Based on an overall assessment, GDP growth projection for 2018-19 is retained, as in the June statement, at 7.4 per cent, ranging 7.5-7.6 per cent in H1 and 7.3-7.4 per cent in H2, with risks evenly balanced; GDP growth for Q1:2019-20 is projected at 7.5 per cent," it added.
With inflation turning sticky, the central bank was widely expected to tighten the monetary policy. Consumer prices hardened to 5 per cent in June, from 4.87 per cent in May. With this, the pace of retail inflation climbed for the third consecutive month.
Though the prices remained below its estimated trajectory, the RBI has forecast retail inflation at 4.6 per cent in the second quarter of the fiscal, 4.8 per cent in the second half of the fiscal and five per cent for the first quarter of 2019-20.
In the second bi-monthly resolution of 2018-19, it had projected CPI inflation for 2018-19 at 4.8-4.9 per cent in the first half of the financial year and at 4.7 per cent in the second half of the fiscal.
Though the monetary policy statement noted that inflation projections for the second quarter have been revised marginally downwards compared to the June statement, several risk factors persist, including volatile crude oil prices and global financial markets, as well as concerns of fiscal slippage by the Centre or States.
It also noted that households’ inflation expectations have risen significantly in the last two rounds along with the expectations of manufacturing firms of a hardening of input prices. Regional distribution of monsoon also has to be carefully monitored, while staggered HRA revisions by state governments could have a second round impact on inflation as well.
The RBI policy retained the GDP growth projection for 2018-19, as in the June statement, at 7.4 per cent, ranging between 7.5-7.6 per cent in the first half of the fiscal and 7.3-7.4 per cent in the second half of the fiscal. GDP growth for the first quarter of 2019-20 is projected at 7.5 per cent, it further said.
Various indicators suggest economic activity continued to be strong, an RBI said adding that the progress of the monsoon so far and a sharper than the usual increase in MSP of kharif crops are expected to boost rural demand by raising farmers’ income. Robust corporate earnings, especially that of fast moving consumer goods
(FMCG) companies, also reflect buoyant rural demand. Investment activity remains firm even though there has been some tightening of financing conditions in the recent period. Chetan Ghate, Pami Dua, Michael Debabrata Patra, Viral Acharya and Urjit Patel voted in favour of the decision and Ravindra Dholakia voted against the decision.
The next meeting of the MPC is scheduled from October 3 to 5, 2018. (UNI)