In hawkish pause, RBI leaves key rates unchanged

RBI To Keep Key Policy Rates Unchanged Say Economists

Government has deviated from fiscal consolidation path outlined earlier said Tushar Arora HDFC Bank

Mumbai (Maharashtra) [India], Feb 6 (ANI): In the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) meeting, which will be held today in Mumbai, the apex bank is expected to keep policy rates on hold for this week.

"On the basis of an assessment of the current and evolving macroeconomic situation at its meeting today, the Monetary Policy Committee (MPC) chose to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.0 per cent", the central bank said in a press statement.

The RBI upped its inflation forecast to 5.1 per cent for the fourth quarter of 2017-18, which ends on March 31.

"The monetary policy was far less hawkish than expected given that RBI's inflation target had been busted, fiscal limits breached and uncertainty on critical prices such as oil and local food prices (specifically the MSPs of procured food items) has multiplied". A combination of factors, including rising oil prices, fiscal slippage and impact of higher support price for the farmers, is likely to influence RBI's policy decision. There is need for vigilance around the evolving inflation scenario in the coming months.

Deterioration in public finances risks crowding out of private financing and investment, it said, adding that the nascent recovery needs to be carefully nurtured.

Five members of the panel voted to keep rates unchanged, while Michael Patra, executive director at the central bank, wanted to raise rates by 25 basis points. On the other hand, RBI chose to maintain the current level, indicating cautiousness due to the rising rate of inflation. A pick-up in global growth in the US, European Union and Japan-the first time since the great financial crisis 2007-may exert further pressure on crude oil, which is already at a three-year high, and rising commodity prices could have inflationary impact on the domestic economy. "This may feed into inflation", he said.

Growth: In the last policy, FY18 growth projection was kept unchanged at 6.7%.

The second challenge is more hard than the first one as transmission of lower rates can happen with the improvement of asset quality of the banking system.

On the economic growth front, there has been some improvement as the effects of the twin blows of demonetisation and GST implementation are waning. All other ratios also remained intact in the RBI Monetary Policy.

The RBI kept a neutral stance at its sixth and last bi-monthly monetary policy review of 2017-18, much to the relief of market players.

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