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RBI leaves repo rates unchanged, predicts slower growth

RBI

The Reserve Bank of India’s Monetary Policy Committee chaired by Governor Urjit Patel concluded its sixth and final bi-monthly meeting yesterday and made major announcements on lending rates and predictions on economic growth for this year.

The central bank decided to keep repo rate unchanged at 6% under liquidity adjustment facility. Even reverse repo rate of 5.75% along with marginal standing facility and bank rate of 6.25% were not tweaked by the RBI.

Five of the six Committee members had voted in favour of keeping key lending rates constant, while one member, M.D. Patra, had backed increase of 25 basis points (bps).

The Reserve Bank cited hardening U.S. bond yields, fluctuating global crude oil prices and possible slippage of the government’s fiscal consolidation targets as reasons for not changing lending rates. Governor Patel explained that capital expenditures are already being taxed in several ways and, hence, interest rates must be kept constant.

The central bank also expressed some concerns and revised its predictions of economic growth on the lower side. It claimed that factors like higher MSP promised to farmers, increased custom duties on consumer goods and slipping fiscal targets announced under the union budget could lead to slow growth.

Consequently, RBI trimmed its growth forecast from 6.7% to 6.6%. Retail inflation for the first half of FY 2018-19 was also predicted to reach up to 5.1%, assuming normal monsoon, which is much higher than RBI’s previous prediction of 4.3-4.7%.

There was also some good news as the central bank lauded Finance Minister Arun Jaitley’s budget for according extra focus on rural and infrastructure sectors. Patel explained that these factors, coupled with stabilizing GST, steady investments and rising exports, will push economic activities this year.

Markets reacted to RBI’s declarations by closing at marginally lower levels than the previous day. Sensex closed at 34,082 points (down by 0.33%) while Nifty ended trading at 10,476 (lower by 21 points).

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