Mumbai, Dec 5 (IANS) Upside risks to inflation led the Reserve Bank of India (RBI) on Wednesday to keep its key lending rate for commercial banks unchanged at 6.5 per cent for the second time in succession.
Consequently, the central bank’s reverse repo rate has been maintained at 6.25 per cent, and the marginal standing facility (MSF) rate and the bank rate at 6.75 per cent.
The RBI’s monetary policy committee (MPC) also made no changes to its stance of “calibrated tightening” in its penultimate monetary policy review of the current fiscal. The stance was adopted in the last policy review conducted in October.
The decision on keeping the policy rate unchanged was taken unanimously by the six-member MPC headed by RBI Governor Urjit Patel. However, government nominee in the MPC, Ravindra Dholakia, voted to change the stance back to neutral.
According to the RBI, even as inflation projections have been revised downwards significantly and some of the risks pointed out in the last resolution have been mitigated, especially of crude oil prices, several uncertainties still cloud the inflation outlook.
“The MPC noted that the benign outlook for headline inflation is driven mainly by the
unexpected softening of food inflation and collapse in oil prices in a relatively short period of time,” Patel said at the post-meeting press conference.
“Excluding food items, inflation has remained sticky and elevated, and the output gap
remains virtually closed.”
Although the central bank has lowered its CPI (consumer price index), or retail inflation, projection, it did not change the policy stance.
Accordingly, the central bank believes that there are challenges like a sudden spike in prices of perishable food items, risks from revision in minimum support prices (MSPs) and rise in crude oil price to inflation and inflationary outlook.
However, the review statement indicated a scope for a change in policy stance, if the upside risks to inflation do not materialise.
“RBI looks at the medium term target. Our projection for the inflation for the second quarter 2019-20 is 4.2 per cent, that is, over a one-year time frame which is higher than the medium-term target,” RBI Deputy Governor Viral Acharya said in response to a question on inflation targeting and not changing the stance.
The RBI’s MPC is mandated to achieve the medium-term target for CPI inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.
The RBI also maintained its GDP growth projection for the current fiscal at 7.4 per cent as in the October policy, and at 7.5 per cent for the first half of 2019-20, “with risks somewhat to the downside”.
“The MPC also noted that even as escalating trade tensions, tightening of global financial conditions and slowing down of global demand pose some downside risks to the domestic economy, the decline in oil prices in recent weeks, if sustained, will provide tailwinds,” Patel said.
On the steps to increase liquidity, RBI announced a reduction of SLR (Statutory Liquidity Ratio) from the current 19.5 per cent of net demand and time liabilities (NDTL) to 18 per cent over a period of six quarters starting from the January-March 2019 quarter.