Keeps Key Rates Unchanged
The Reserve Bank of India (RBI) has come out with its Sixth Bi-monthly Monetary Policy review (2017-18), wherein, it maintains status quo on the policy rates while keeping a neutral stance but mentioned about lurking inflationary threat, fiscal slippage, surging global crude oil prices and the likely fallout of volatility in global financial markets. The decision of the Monetary Policy Committee (MPC) is consistent with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth. Following are the policy measures and vital announcements by the RBI.
- The RBI has kept the Repo Rate under the Liquidity Adjustment Facility (LAF) unchanged at 6.00% for the third time in a row. Accordingly, Reverse Repo Rate under the LAF determined with a spread of 25 basis points below the Repo rates remain unchanged at 5.75%. Marginal Standing Facility (MSF) and the Bank rate both determined with a spread of 25 basis points above the Repo rate remain unchanged at 6.25%. On the liquidity front, RBI left the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) of scheduled Banks unchanged at 4.00% and 19.50% of their net demand and time liability (NDTL) respectively.
- The Economic Survey expects real GDP growth to reach 6.75% in FY18, higher than the CSO’s forecast of 6.5%, implying that growth in the second half would rebound to 7.5%. Economic Survey of India projected India’s GDP to grow at 7- 7.5% in 2018-19 which is in-line with the World Bank forecast of 7.3% and the International Monetary Fund (IMF) forecast of 7.4 % with exports and private investment set to rebound.
- The growth rate of real Gross Value of Added (GVA) as per the first advance estimates is estimated to decelerate to 6.1% in 2017-18 from 7.1% in 2016-17. This is on account of slower growth in agriculture and allied activities, mining and quarrying, manufacturing, and public administration and defence (PADO) services. GVA growth for 2017-18 is projected at 6.6%. GVA growth for 2018-19 is projected at 7.2% overall – in the range of 7.3-7.4% in H1 and 7.1-7.2% in H2.
- The growth outlook will be influenced by several factors such as GST implementation is stabilizing, which augurs well for economic activity; there are early signs of revival in investment activity; RBI seeks pick-up in credit growth due to recapitalisation of PSBs and resolution proceedings under Insolvency and Bankruptcy Code (IBC); export growth expected to improve further on account of improving global demand and focus of Union Budget on rural and infrastructure sectors is a welcome development.
- The December bi-monthly resolution projected inflation in the range of 4.3-4.7% in the second half of 2017-18, including the impact of increase in HRA. In terms of actual outcomes, headline inflation averaged 4.6% in Q3 and considering many factors, inflation is now estimated at 5.1% in Q4, including the HRA impact.
- CPI inflation for 2018-19 is estimated in the range of 5.1-5.6% in H1, including diminishing statistical HRA impact of central government employees, and 4.5-4.6% in H2, with risks tilted to the upside.
- The projected moderation in inflation in the second half is on account of strong favorable base effects, including unwinding of the 7th CPC's HRA impact, and a softer food inflation forecast, given the assumption of normal monsoon and effective supply management by the Government.
- However, core sector growth decelerated in December due to contraction/deceleration in production of coal, crude oil, steel and electricity. Acreage in the case of wheat, oilseeds and coarse cereals was lower than last year. As a result, the shortfall in area sown for rabi crops increased to (-)1.5% as on February 2, 2018 as compared with (-)1.0% on December 29, 2017.
- The liquidity in the system continues to be in surplus mode, but it is moving steadily towards neutrality. The weighted average call rate (WACR) traded 12 bps below the repo rate during December-January as against 15 bps below the repo rate in November.
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- The MPC notes that the economy is on a recovery path, including early signs of a revival of investment activity. Global demand is improving, which should help strengthen domestic investment activity.