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RBI monetary policy: RBI holds repo rate at 6%, predicts higher inflation in short term

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NEW DELHI: The monetary policy committee (MPC) of the Reserve Bank of India (RBI) on Wednesday, kept repo rate unchanged at 6 per cent at the end of it two-day meet. Repo rate is the rate of interest at which the central bank lends money on short-term to banks. The MPC voted 5-1 in favour of keeping the rates unchanged with Deputy Governor Michael Patra voting for a rate hike.

The decision came in line with expectations as 58 out of 60 economists in a Reuters poll had predicted a status quo.

The reverse repo rate- the rate of interest at which RBI borrows money from commercial banks- has also been kept unchanged at 5.75 per cent.

Despite maintaining a ‘neutral’ stance, the RBI’s tone turned more hawkish on rising inflation. The central bank hiked the inflation projection for the January- March 19 quarter to 5.1 per cent from 4.7 per cent it had predicted in its last policy meeting.

The GVA (Gross Value Added) for the financial year 2018 has been revised to 6.6 per cent from 6.7 per cent.

The rate of retail inflation, which is an indicator of consumer price rise, hit a 17-month high of 5.21 per cent in December and is expected to remain above the RBI’s 4 per cent target over the coming 12 months. In a move that could push inflation higher in coming months, Finance Minister Arun Jaitley increased government spending for rural areas and announced a larger fiscal deficit target in his annual budget speech last week.

Experts however opined that the RBI will employ a wait-and-watch policy in the short term. “Inflation is rising and the government has also deviated from the fiscal consolidation path outlined earlier. Clearly, the pressure is building on the RBI to hike rates. However, we expect a status quo in the near-term,” said Tushar Arora, senior economist at HDFC Bank. “We believe that the RBI is likely to wait and see how durable these upside risks are,” Arora added ahead of the rate announcement.

Unlike the last few months, the government and the central bank seem to be on the same page as far as rate revision is concerned. The pick up in economic activity in the second half of the current financial year is expected to ease the government’s pressure on RBI to cut lending rates. RBI has been thwarting the government’s advances in this regard citing inflationary pressure. After presenting the pre-budget Economic Survey to Parliament last month, Chief Economic Adviser Arvind Subramanian seconded RBI’s view by indicating that the scope for RBI to lower interest rate may be limited with growth picking up and inflation hardening.

Updated: February 7, 2018 — 8:29 am

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