RBI holds repo rate at 6%, lowers 2018-19 inflation forecast (Roundup)

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Mumbai, April 5 (IANS) The RBI on Thursday maintained the status quo on its key short-term lending rate at 6 per cent, along with its ‘neutral’ stance, at the first bi-monthly monetary policy review of the new fiscal, even as both government and India Inc described the move “as expected” while lauding the RBI’s downward projection of the inflation rate.

This is the fourth policy review in succession that the Reserve Bank of India’s (RBI) six-member Monetary Policy Committee (MPC) has kept the repo, or short-term interest rate for commercial banks, unchanged, according to the RBI monetary policy statement.

“The decision of the 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 4 per cent, while supporting growth,” it said.

Consequently, the reverse repo rate remains at 5.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 6.25 per cent.

As per official data, retail inflation based on the CPI fell to 4.44 per cent in February, from 5.07 per cent in January, but remained outside the RBI’s medium-term target of 4 per cent.

“We continue to remain vigilant on how inflation unfolds, in the sense that we are data dependent,” RBI Governor Urjit Patel said at a media briefing here following the MPC meeting.

He said that several uncertainties continue to surround “the baseline inflation path”.

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“The revised formula for MSP (minimum support price) — as announced in the Union Budget 2018-19 for kharif crops — may have an impact on inflation, although the exact magnitude will be known only in the coming months,” he said.

“Besides, in case of further fiscal slippage from the Union Budget estimates for 2018-19 or the medium-term path, it could adversely impact the outlook on inflation. Another risk is from fiscal slippages by states on account of higher committed revenue expenditure.”

“Also, companies polled by the RBI expect input and output prices to rise, going forward,” he added.

The central bank lowered its inflation forecast for the first half of the current fiscal to between 4.7 per cent and 5.1 per cent, and 4.4 per cent for the second half.

According to the MPC statement, the recent volatility in global crude prices has brought considerable uncertainty to the near-term inflation outlook.

The MPC noted that growth has been recovering and the output gap is closing, which “is also reflected in a pick-up in credit offtake in recent months”.

On the downside, the central bank noted that “rising trade protectionism and financial market volatility could derail the ongoing global recovery”.

“In this unsettling global environment, it is especially important that domestic macroeconomic fundamentals are strengthened, deleveraging of distressed corporates and rebuilding of bank balance sheets persisted with, and the risk-sharing markets deepened,” the RBI said.

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In a repeat of the previous policy review in February, five members of the MPC, including the three external ones and the Governor, voted in favour of the decision, while RBI Executive Director Michael Patra voted for an increase in the repo rate by 25 basis points.

In a separate decision on Thursday on consumer protection and to curb evils like money laundering, the RBI barred all regulated entities, including banks, from dealing in virtual currencies like bitcoins, following its earlier multiple warnings on their risks.

Regulated entities already providing services to any individual or business dealing in digital currencies are being given three months to exit the relationship, RBI Deputy Governor B.P. Kanungo told reporters here.

Noting, however, the benefits that blockchain technology, which underlies cryptocurrencies, can potentially bring for financial inclusion and to increasing financial system efficiency, Kanungo said the central bank is exploring a “fiat digital currency” and that an RBI inter-departmental committee has been constituted to prepare a report on the matter.

He also said the RBI has decided that all payment system players in India will now be required to store data within the country to ensure their safety and security. Currently only some payment system operators and their outsourcing partners store their data either partially or completely in India.

The government welcomed the RBI’s monetary policy statement saying “the inflation forecast for H1 of FY19 has been revised downwards from 5.1-5.6 per cent to 4.7-5.1 per cent, and from 4.5-4.6 per cent to 4.4 per cent in H2 of FY19.”

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Comenting on the development, industry chamber Assocham said the RBI policy review was on “expected” lines due to the concerns “regarding upside risks to inflation arising from possible fiscal slipages, volatility in crude pricesand revised formula for the MSP for khariff crops”.

“The RBI has rightly flagged certain issues like the impact of MSP revision on the prices and possible fiscal slippages at both the Centre and the states,” Assocham President Sandeep Jajodia said in a statement.

Industry body Ficci President Rajesh Shah said: “While the RBI has maintained status quo in current monetary policy statement, we hope it will soon consider cut in policy rate and give a further boost to demand and investments.”

Rajnish Kumar, Chairman, State Bank of India, said: “More than the RBI decision to keep rates unchanged, the tone of the policy is a pleasant surprise for the market. The decision to revise downwards the inflation projections and upwards the growth numbers is the best one could have asked for.”

Chanda Kochhar, MD and CEO, ICICI Bank, said: “The significant positive in the monetary policy was the downward revision of inflation projections. The MPC has prudently voiced concerns about the possible interplay of domestic and global risk factors that could play out over the medium term.”

–IANS

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