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RBI keeps repo rate at 6%, maintains ‘neutral’ stance

07 February, 2018

The Reserve Bank of India (RBI) on Wednesday kept its main repo rate on hold for a third consecutive policy meeting and retained its “neutral” bias, warning it would closely monitor accelerating inflation but also saying economic growth needs to be nurtured.

All but two of 60 economists in a Reuters poll predicted the repo rate would be kept at 6.00 percent, the lowest level since November 2010. The reverse repo rate was held at 5.75 percent.

The decision came after surging oil and food prices pushed India’s annual consumer inflation to a 17-month high of 5.21 percent in December – well above the RBI’s 4 percent target.

Inflation is expected to accelerate further after the government’s budget last week widened its fiscal deficit target for the fiscal year starting in April to help finance a sharp increase in spending on rural areas and health-care.

The RBI said it expected an annual inflation rate of 5.1 percent in the January-March quarter, and would likely accelerate to 5.1 to 5.6 percent in the first half of the fiscal year starting in April over factors such as higher crude prices, and said risks were “tilted to the upside”.

“There is … need for vigilance around the evolving inflation scenario in the coming months,” the RBI said.

The benchmark 10-year bond yield fell 8 basis points from levels before the decision, while the rupee was trading at 64.16 per dollar, slightly stronger. The broader NSE Nifty was marginally higher.

ONE VOTE FOR HIKING

Five members of the monetary policy committee voted to keep rates unchanged, with one member, RBI Executive Director Michael Patra, voting for a 25 basis points hike.

Before Wednesday’s meeting, speculation on a rate hike increased. The Reuters poll showed 14 out of 35 analysts believe the RBI will hike rates by the end of 2018, up from 7 out of 27 in December.

Bond investors have priced in rate hikes, with the benchmark 10-year bond yields rising more than 100 basis points since July, the biggest move since a crisis in 2013 with the rupee.

But questions remain about how soon the RBI can tighten, given the economy is expected to grow only 6.7 percent in the current fiscal year – the slowest pace in about three years.

The RBI slightly lowered its gross value added forecast – a measure of economic growth it prefers – for the year ending in March to 6.6 percent from its previous forecast of 6.7 percent.

“The (Monetary Policy) Committee is of the view that the nascent recovery needs to be carefully nurtured and growth put on a sustainably higher path through conducive and stable macro-financial management,” the central bank said.

The RBI has held the repo at 6.0 percent since a 25 basis point cut in August. It took advantage of a period of extraordinary low inflation to cut rates by 200 bps between early 2015 and August 2017.

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RBI keeps repo rate at 6%, maintains ‘neutral’ stance

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