The Reserve Bank today kept benchmark interest rate unchanged on fears of rising inflation while lowering growth forecast to 6.7 per cent for the current fiscal, but looked to spur the cooling economy by freeing over Rs 55,000 crore for banks to lend.
With five of the six members of the Monetary Policy Committee (MPC) voting for no change, RBI at its bi-monthly policy review kept benchmark repurchase or repo rate at near seven-year low of 6 per cent.
Keeping its policy stance at 'neutral', the Reserve Bank of India (RBI) raised its inflation forecast to a range of 4.2 to 4.6 per cent during remainder of current fiscal as against 4 to 4.5 per cent previously stated.
It also lowered growth estimate for the fiscal ending March 31, 2018 to 6.7 per cent from previously predicted 7.3 per cent.
However to spur the economy, it lowered the proportion of deposits banks need to invest in specified securities, such as government bonds, to 19.5 per cent from 20 per cent effective October 14, freeing over Rs 55,000 crore for banks to lend.
RBI had lowered the Statutory Liquidity Ratio (SLR) by the same amount in June.
The implementation of Goods and Services Tax (GST) had an adverse impact on manufacturing and may delay investment revival, it said hoping that there will be simplification of the new indirect tax regime to the ease business process.
Like the repo rate, the reverse repo - the rate at which RBI borrows from banks, has been kept unchanged at 5.75 per cent, it said at the fourth bi-monthly policy review.
In its last review in August RBI had slashed the benchmark lending rate by 0.25 percentage points to 6 per cent, the lowest in 6 years.
Commenting on RBI's policy stance, Finance Ministry in a statement said, "We have noted that this decision has been made by the MPC in light of the underlying analysis which implies a downward revision of the real GVA growth forecast for 2017-18 from 7.3 per cent to 6.7 per cent, which leads to a widening of the output gap."
Economic Affairs Secretary S C Garg said RBI projects increasing growth of 6.4 per cent, 7.1 per cent, and 7.7 per cent in the second to fourth quarters.
Inflation projections for the year as a whole remain below 4 per cent, he tweeted.
The central bank said it stays committed to keeping inflation close to 4 per cent and said it is "imperative to reinvigorate investment activity".
"Although the domestic food price outlook remains largely stable, generalised momentum is building in prices of items excluding food, especially emanating from crude oil," RBI said.
"Given the inflation outlook, there did not seem much room for monetary policy adjustments," deputy governor in- charge of the monetary policy function, Viral Acharya, told reporters at the customary post-policy interaction.
Governor Patel said RBI has spelt out the upside risks to the inflation target like a hike in HRA and dearness allowances for government employees.
It also cautioned against populist measures like farm loan waivers and a fiscal stimulus to boost the sagging growth, but said there also exist mitigating factors like the possibility of a dip in commodity prices and food inflation.
"We will basically have to wait and watch on how inflation evolves," Acharya said, adding that even though household inflation expectations continue going down, they still remain "relatively high".
On growth, Acharya hinted it is not fair to extrapolate the 5.7 per cent GDP expansion in the June quarter into a trend which was a three-year low, while Patel pointed out to recent high frequency data like a surge in core sector which shows a reversal.
Patel further said that factors like these will help in a bounce back in the second half of the fiscal, even as private investment continues to be depressed.
Acharya said reviving private investment can take up to 12-18 months, while Patel said as capacity utilisation levels move up, there can be a revival in the investment activities.
The RBI also announced a slew of regulatory policies and said that it will be releasing the final guidelines on peer-to -peer lending later this evening.
RBI continued to flay banks for keeping the lending rates high and flagged concerns over base rate and marginal cost of fund-based lending rate (MCLR), saying these have not been able to improve monetary transmission.
An internal RBI group also suggested switching over to an external benchmark in a time-bound manner so that better rates are available to borrowers.
The MPC said structural reforms introduced in the recent period will likely be growth augmenting over the medium-to long-term by improving the business environment, enhancing transparency and increasing formalisation of the economy.
Markets were expecting the MPC to vote for a status quo on the rates at the policy announcement.
The government has been working on a plan to push up growth but has not announced any move yet. It cut the excise duty on fuels by Rs 2 in order to minimise the impact of increasing global fuel prices on domestic consumers, a move which heightens the risk of a fiscal slippage.
"Recapitalising public sector banks adequately will ensure that credit flows to the productive sectors are not impeded and growth impulses not restrained," it said.
(This article has not been edited by Zeebiz editorial team and is auto-generated from an agency feed.)