RBI keeps repo rate on hold at 6%; cuts growth outlook
Photo Credit: Shah Junaid/VCCircle

The Reserve Bank of India (RBI) kept its policy rate steady at a near seven-year low of 6.00 percent on Wednesday despite a sharp slowdown in economic growth, after a surge in inflation that threatened the central bank’s target.

The decision had been widely expected, with all but three of the 60 analysts polled by Reuters having forecast the repo rate would be kept unchanged after the RBI lowered it by 25 basis points (bps) at its last meeting in August.

But policymakers surprised investors by taking steps to release more liquidity into the financial system, which will give banks more funds to lend.

The RBI said it would lower the statutory liquidity ratio (SLR), or the amount of bonds that banks must set aside with the central bank, by 50 bps to 19.50 percent from mid-October.

The move sent bonds sharply lower due to worries about more supply, but the rupee and stock markets rose.

The RBI said in a statement that the decision to keep the repo rate on hold reflected its concern that consumer inflation could accelerate further after hitting a five-month high of 3.36 percent in August, not far from the central bank’s 4 percent target.

The RBI said it would thus keep its policy stance at “neutral,” even as the central bank is facing pressure from government officials and executives for more rate cuts to prop up an economy growing at its slowest pace in over three years.

“The MPC (monetary policy committee) remains committed to keeping headline inflation close to 4 per cent on a durable basis,” the RBI said.

Five members of the committee voted to keep rates unchanged, while one voted for a cut of “at least” 25 bps.

The RBI also kept the reverse repo rate unchanged at 5.75 percent.

The benchmark 10-year bond rose 9 bps to 6.68 percent after the SLR decision. But the rupee strengthened to 65.22 per dollar from around 65.34 before the announcement, while the NSE share index was up 0.7 percent.

The RBI has long made clear that keeping inflation at around 4 percent, the midpoint of its mandated target of 2 to 6 percent, would be its policy priority.

The RBI also raised its inflation projection for October-March to a range of 4.2 to 4.6 percent, above its inflation target and above its previous projection.

Among its concerns on inflation, RBI cited rising food prices, price revisions after the recent implementation of a national goods and services tax, and stubbornly high core inflation.

By standing pat, the RBI could face pressure from government officials and executives to do more to help prop up an economy that in just months has gone from one of fastest expansions in the world to growing by only 5.7 percent in April-June, well below the 8 percent needed to generate full employment.

RBI officials took advantage of an extraordinary period of low inflation to cut rates by 200 basis points from January 2015 to August 2017, when it became the first Asian central bank to cut rates this year.

But the RBI is now pivoting to tackle accelerating inflation, despite cutting its end-March projection for gross value added - the indicator of economic growth it prefers - to 6.7 percent from its previous forecast of 7.3 percent.

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