RBI chooses inflation over growth, keeps repo rate unchanged
RBI has decided to keep key rates unchanged during its bi-monthly monetary policy meeting in Mumbai on October 4, 2017. RBI also revised GVA growth downwards to 6.7% from its earlier projection of 7.3%.
- RBI and MPC maintains neutral stance
- Revises GVA growth expectations to 6.7% from 7.3% earlier
- Stresses on recapitalisation of public sector banks
The Reserve Bank of India (RBI) has decided to keep key interest rates unchanged at 6% during its October bi-monthly monetary policy.
RBI, in a statement said, "The decision of the MPC 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% within a band of +/- 2%, while supporting growth."
The reverse repo rate under the LAF remains at 5.75%, and the marginal standing facility (MSF) rate and the Bank Rate at 6.25%.
RBI said that inflation is expected to rise from its current level and range between 4.2-4.6% in the second half of this year, including the house rent allowance by the Centre. It said, "Actual inflation outcomes so far have been broadly in line with projections, though the extent of the rise in inflation excluding food and fuel has been somewhat higher than expected."
RBI said that the loss of momentum in Q1 of 2017-18 and the first advance estimates of kharif foodgrains production are early setbacks that impart a downside to the outlook. "The implementation of the GST so far also appears to have had an adverse impact, rendering prospects for the manufacturing sector uncertain in the short term. This may further delay the revival of investment activity, which is already hampered by stressed balance sheets of banks and corporates."
It added, "Consumer confidence and overall business assessment of the manufacturing and services sectors surveyed by the Reserve Bank weakened in Q2 of 2017-18; on the positive side, firms expect a significant improvement in business sentiment in Q3. Taking into account the above factors, the projection of real GVA growth for 2017-18 has been revised down to 6.7% from the August 2017 projection of 7.3%, with risks evenly balanced."
RBI said, "Teething problems linked to the GST and bandwidth constraints may get resolved relatively soon, allowing growth to accelerate in H2."
The MPC reiterated that it is imperative to reinvigorate investment activity which, in turn, would revive the demand for bank credit by industry as existing capacities get utilised and the requirements of new capacity open up to be financed. "Recapitalising public sector banks adequately will ensure that credit flows to the productive sectors are not impeded and growth impulses not restrained," the RBI statement read.
MPC said that measures have to be undertaken to support growth and achieve a faster closure of the output gap. These are, a concerted drive to close the severe infrastructure gap; restarting stalled investment projects, particularly in the public sector; enhancing ease of doing business, including by further simplification of the GST; and ensuring faster rollout of the affordable housing program with time-bound single-window clearances and rationalisation of excessively high stamp duties by states.
The RBI statement said, "The MPC was of the view that various 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. The Reserve Bank continues to work towards the resolution of stressed corporate exposures in bank balance sheets which should start yielding dividends for the economy over the medium term."
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