RBI Policy Review: Key highlights
RBI Policy Review Highlights: A rate hike would have made domestic yields on debt more attractive for foreign investors and contain inflationary pressures from high crude prices as India imports more than two-thirds of its oil needs.
The RBI Governor Urjit Patel-led monetary policy committee (MPC) on Friday maintained status quo setting aside all the speculation of the repo rate hike. It was expected that the RBI will hike the repo rate to combat inflationary pressures as it grapples with a weakening rupee, surging oil prices and market instability sparked by a major non-bank finance firm`s defaults.
A rate hike would have made domestic yields on debt more attractive for foreign investors and contain inflationary pressures from high crude prices as India imports more than two-thirds of its oil needs.
Check Key highlights here:
* Policy Repo rate under the liquidity adjustment facility (LAF) unchanged at 6.5 percent
* Consequently, the reverse repo rate under the LAF remains at 6.25 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 6.75 per cent.
* The decision of the MPC is consistent with the stance of calibrated tightening 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.
* Economic activity in major emerging market economies (EMEs) has been facing headwinds from both global and country -specific factors.
* Retail inflation, measured by the y-o -y change in the CPI, fell from 4.9 per cent in June to 3.7 per cent in August, dragged down by a decline in food inflation. Some softening of inflation in items other than food and fuel also contributed to the decline. Adjusting for the estimated impact of an increase in house rent allowance (HRA) for central government employees, headline inflation was at 3.4 per cent.
* Real gross domestic product (GDP) growth surged to a nine-quarter high of 8.2 per cent in Q1:2018-19, extending the sequential acceleration to four successive quarters. Of the constituents, gross fixed capital formation (GFCF) expanded by double digits for the second consecutive quarter, driven by the government’s focus on the road sector and affordable housing. Growth in private final consumption expenditure (PFCE) accelerated to 8.6 per cent, reflecting rising rural and urban spending, supported by retail credit growth. However, government final consumption expenditure (GFCE) decelerated, largely due to a high base. The growth of exports of goods and services jumped to 12.7 per cent, powered by non-oil exports on the back of strong global demand. In spite of import growth continuing to surge, high exports growth helped reduce the drag from net exports on aggregate dem and.
* Retains GDP growth estimate at 7.4 pc for current fiscal
* Global economic activity becoming uneven, outlook clouded by uncertainties
* Excise cut in petrol and diesel will moderate retail inflation
* Rise in oil prices may have a bearing on disposable incomes, dent profit margins of corporates
* Oil prices remain vulnerable to further upside pressures
* Global, domestic financial conditions tightened, may dampen investment activity
* Exports outlook uncertain
* Fiscal slippage at the centre/state to have a bearing on the inflation outlook, besides heightening market volatility and crowding out private investment
* The MPC decided to keep the policy repo rate unchanged. The MPC reiterates its commitment to achieving the medium-term target for headline inflation of 4 per cent on a durable basis.
* Regarding the policy repo rate, Dr. Pami Dua, Dr. Ravindra H. Dholakia, Dr. Michael Debabrata Patra, Dr. Viral V. Acharya and Dr. Urjit R. Patel voted in favour of keeping the policy repo rate unchanged. Dr. Chetan Ghate voted for an increase in the policy rate by 25 bps. The RBI
* Regarding the stance, Dr. Pami Dua, Dr. Chetan Ghate, Dr. Michael Debabrata Patra, Dr. Viral V. Acharya and Dr. Urjit R. Patel voted in favour of changing the stance to calibrated tightening. Dr. Ravindra H. Dholakia voted to keep the neutral stance unchanged. The minutes of the MPC ’s meeting will be published by October 19, 2018.
* The MPC notes that global headwinds in the form of escalating trade tensions, volatile and rising oil prices, and tightening of global financial conditions pose substantial risks to the growth and inflation outlook. It is, therefore, imperative to further strengthen domestic macroeconomic fundamentals.
* The next meeting of the MPC is scheduled from December 3 to 5, 2018.
India's inflation rate was 3.69 percent in August and is expected to go above the RBI`s projected 5 percent by June 2019 on higher fuel prices, the weak rupee and strong consumer spending.