RBI monetary policy: Repo rate unchanged at 6%, inflation forecast hiked

The monetary policy committee (MPC) of the Reserve Bank of India (RBI), led by Governor Urjit Patel, kept its policy rate unchanged on Wednesday, as widely expected, after inflation accelerated to a seven-month high and stronger economic growth reduced the need for monetary stimulus.

The market also seemed to be of the view that the six-member monetary policy committee will not change the policy repo rate. Besides rising inflation, the issues of hardening bond yields and tightening liquidity have reduced the scope for RBI loosen its stance.

Ten economists and bond dealers polled by Business Standard said the policy repo rate was expected to stay put at six per cent. Even as the policy stance would likely remain ‘neutral’, many economists said this could be the end of a rate-easing cycle.

In the October review of its monetary policy, the MPC had kept the benchmark interest rate unchanged and lowered its growth forecast for the country’s economy in 2017-18 to 6.7 per cent.

The central bank had last tinkered with the policy rate in August, when it brought the repo rate down by 25 basis points to a six-year low of six per cent.

The RBI also kept the reverse repo rate unchanged at 5.75 per cent. Wednesday's decisions were widely predicted after the annual rate of consumer inflation increased in October to 3.58 per cent, driven by higher food and crude oil prices. That's still low by Indian standards, but not far from the central bank's 4 per cent target.

Nonetheless, some analysts still see scope for a rate cut should inflation accelerate less than expected. That is because the economy, though recovering from July's bumpy launch of a national sales tax, is not yet growing fast enough to create the jobs needed for India's young workforce.

The RBI on Wednesday left its policy stance "neutral", which might leave the door open for a rate move at its next meeting in February. The central bank said it would track economic growth and inflation data, adding that risks to both "evenly balanced".

Five members of the Monetary Policy Committee (MPC) voted to keep rates unchanged, with one voting for a 25 bps cut.

"Keeping in mind the output gap dynamics, the MPC decided to continue with the neutral stance and watch the incoming data carefully," the RBI said in a statement.


Key highlights
RBI maintains status quo, keeps repo rate unchanged at 6 per cent; maintains neutral stance.
MSF, bank rate unchanged at 6.25 per cent
Real GVA growth aim stays at 6.7 per cent with risks evenly balanced
MPC committed to keep CPI close to 4 per cent on durable basis
Monetary policy highlights:
— Q2 Growth was lower than projected in the October policy
— Recent increase in crude prices may have a negative impact on GVA growth
— Shortfalls in kharif production and rabi sowing pose downside risks to agri outlook
— There has been some pick-up in credit growth in recent months
RBI's growth projections for FY18
— FY18 real GVA maintained at 6.7 per cent
— Q3 GVA seen at 7 per cent
— Q4 GVA seen at 7.8 per cent
Highlights of Monetary Policy: 
— Upward trajectory in flation may continue in the near-term
— Impact of HRA by the central government is expected to peak in December
— Recent rise in international crude oil prices may sustain
— Q3, Q4 inflation estimated in 4.3-4.7 per cent range
RBI Governor Urjit Patel: Governance reforms for all PSU Banks will also feature for all banks. PSU Bank recap bonds to be front-loaded for banks with better balancesheets.
RBI Governor Urjit Patel: MPC considered upside pressure on food and living costs.
RBI deputy governor: Will consider OMOs if liquidity is to be absorbed or injected on durable basis as RBI is still essentially absorbing liquidity.
RBI deputy governor: Overhang of liquidity surplus in banking has come down and banking system is moving towards neutrality. Liquidity condition to be marginally surplus by year-end. Expect liquidity neutrality by first half of next FY.
Working closely with Govt, recapitalization will be front-loaded for banks that have exercised prudence, governance reforms will also feature as part of the overall plan to ensure money is used to strengthen PSBs: Urjit Patel
The next meeting of the MPC is scheduled on February 6 and 7, 2018.
On the whole, inflation is estimated in the range 4.3-4.7 per cent in Q3 and Q4 of this year, including the HRA effect of up to 35 basis points, with risks evenly balanced.
The projection of real GVA growth for 2017-18 of the October resolution at 6.7 per cent has been retained, with risks evenly balanced.
"RBI will continue to manage liquidity rate, will also consider open market consideration," said Viral V Acharya.
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Recent rise in international crude oil prices may sustain
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RBI deputy governor said, "Liquidity conditions continue to normalise."
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At the Monetary Policy Committee meeting, Chetan Ghate, Pami Dua, Michael Debabrata Patra, Viral V Acharya and Urjit R Patel were in favour of keeping the repo rate unchanged while Ravindra H Dholakia voted for a policy rate reduction of 25 basis points.
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Urjit Patel said, "rise in food, fuel prices may further harden expectations".
5 out of 6 MPC members favoured no change in rates
RBI: Going forward, the inflation path will be influenced by several factors. First, moderation in inflation excluding food and fuel observed in Q1 of 2017-18 has, by and large, reversed. There is a risk that this upward trajectory may continue in the near-term. Second, the impact of HRA by the Central Government is expected to peak in December. The staggered impact of HRA increases by various state governments may push up housing inflation further in 2018, with attendant second order effects. Third, the recent rise in international crude oil prices may sustain, especially on account of the OPEC’s decision to maintain production cuts through next year. In such a scenario, any adverse supply shock due to geo-political developments could push up prices even further.
RBI:  The headline inflation outcomes have evolved broadly in line with projections
The October bi-monthly statement projected inflation to rise and range between 4.2-4.6 per cent in the second half of this year, including the impact of increase in house rent allowance (HRA) by the Centre.
CPI inflation excluding food and fuel, which increased from July to September, remained steady in October
The unemployment rate fell to 4.1 per cent in October, the lowest in the last 17 years.
Since the last meeting of the MPC in October 2017, global economic activity has been gaining momentum through the final quarter of the year, driven mainly by advanced economies (AEs).
RBI's decision is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth. The main considerations underlying the decision are set out in the statement below.
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MSF, Bank Rate remains unchanged at 6.25%
MPC committed to keep CPI close to 4 per cent on durable basis
MPC member R Dholakia favoured 25 bps cut in Repo Rate
FY18 Real GVA growth aim stays at 6.7% with risks evenly balanced
CPI seen 4.3-4.7% Oct-Mar including rent allowance hike
Monetary Policy Committee votes 5:1 to maintain status quo on Repo rate
Q3, Q4 CPI inflation likely to be in the range of 4.3-4.7 per cent
RBI reiterated that it is maintaining a "neutral" stance in monetary policy.
RBI increases inflation forecast
Reverse Repo at 5.75%
RBI maintains status quo 
Urjit Patel keeps repo rate unchanged at 6%
RBI policy decision in few minutes 
With inflation trajectory likely to remain upward in the coming months, many analysts see a prolonged pause from RBI. 
RBI is also expected to retain its "neutral" stance, while cautioning about inflation, which accelerated to a seven-month high in October.
RBI's stance on liquidity would also be closely watched. Excess liquidity with banks is down to around Rs. 70,000 crore from a peak of more than Rs. 5 lakh crore in March, according to the Bloomberg Economics India Banking Liquidity Index. That has led State Bank of India and the Punjab National Bank - large state-run lenders - to raise rates on bulk deposits.
With concerns over government's fiscal deficit and rising global crude oil prices, the RBI is likely to reiterate a "neutral" stance, say analysts.
Analysts expect the RBI to reiterate concern about inflation, as the annual rate of consumer inflation increased to 3.58 per cent in October, not far from the central bank's 4 per cent target.
"In the wake of significant spurt in the valuation of many VCs and rapid growth in Initial Coin Offerings (ICOs), RBI reiterates the concerns," the central bank said in a statement.
Reserve Bank of India (RBI) has cautioned the "users, holders and traders" of Bitcoins about the security related risks associated in dealing with such virtual currencies (VCs).
In August, the RBI made its only cut in 2017, of 25 basis points, and in October, it held.

Nifty PSU Bank index slips over 1% ahead of RBI policy outcome
Even as experts rule out a rate cut, some say the RBI might soften its tone somewhat and sound more accommodative
Since the economic growth, despite its apparent recovery, is still behind target, there have been calls from some government officials for the RBI to trim the repo rate again.
For the country to be able to come anywhere close to the full financial year target, the manufacturing and services sectors of the economy will need to do exceptionally well, wrote A K Bhattacharya in a recent Business Standard piece
Despite a recovery when compared with the previous quarters, the Q2 GDP numbers are still well below the 8% target for the 2017-18 financial year
Radhika Rao, an economist with DBS in Singapore, had said: "The recovery is a source of comfort for RBI, as it lowers pressure on the central bank to take a growth-supportive stance."
Official data released last week showed a recovery in India's GDP growth during the July-September quarter to 6.3 per cent on a year-on-year basis, compared with 5.7 per cent during the previous quarter
"It's going to be a status quo. The liquidity in the system is very low, deposit rates are firming up and there are concerns about inflation," Reuters quoted Union Bank MD and CEO Rajkiran Rai G as saying in a recent report
However, not many experts hope the RBI would effect a rate cut in its first meeting of 2018 calendar year, either
The central bank is expected to reiterate a "neutral" stance, which will give it the flexibility to cut rates in February
Similarly, all 10 economists and bond dealers polled by Business Standard said the policy repo rate was expected to stay put at six per cent
52 of the 54 analysts polled by Reuters said the repo rate would be left at 6%, which is already the lowest level since November 2010
Another reason for RBI if it considers a rate cut would be core inflation (excluding food and energy prices), which has remained stubbornly high -- at around 4.5% in October
Also, stronger GDP growth in the secon quarter of this financial year (July-September) has reduced the need for a monetary stimulus
The rate of retail inflation accelerated to a seven-month high of 3.58 per cent in October
It is widely believed that the RBI would not effect any rate cut amid rising inflation levels 
While the government would want the RBI to loosen its monetary policy stance and effect a repo rate cut, experts see the central bank maintaining the status quo today
The Reserve Bank of India will today announce the outcome of its monetary policy committee's two-day bimonthly policy meet