Monetary policy review: RBI keeps policy rates unchanged

The policy repo rate remain unchanged at 6.5 per cent, and the reverse repo rate at 6.25 per cent.

In its fifth bi-monthly monetary policy review, the Reserve Bank of India (RBI) has kept its policy rates unchanged and cut its inflation forecast for the rest of the financial year, citing a sharp fall in crude oil prices and food “deflation”.
 
The policy repo rate remain unchanged at 6.5 per cent, and the reverse repo rate at 6.25 per cent.
 
The marginal standing facility (MSF) rate and the Bank Rate remained at 6.75 per cent.
 
"The decision of the MPC (monetary policy committee) 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," said the six-member monetary policy committee in its statement on Wednesday. 
 
The six-member monetary policy committee (MPC) voted unanimously to keep the policy rate unchanged, while Dr. Ravindra H. Dholakia voted to change the stance to neutral.
 
As per a statement by RBI, excluding food items, inflation has remained sticky and elevated, and the output gap remains virtually closed. It noted that even as escalating trade tensions, tightening of global financial conditions and slowing down of global demand pose some downside risks to the domestic economy, the decline in oil prices in recent weeks, if sustained, will provide tailwinds. 
 
"The acceleration in investment activity also bodes well for the medium-term growth potential of the economy. The time is apposite to further strengthen domestic macroeconomic fundamentals. In this context, fiscal discipline is critical to create space for and crowd in private investment activity. Against this backdrop, the MPC decided to keep the policy repo rate on hold and maintain the stance of calibrated tightening," said the central bank.
 
As per Dharmakirti Joshi, Chief Economist, CRISIL Research, the macroeconomic backdrop – both global and domestic - against which today’s policy was announced has more downside risks to growth vis-à-vis the October policy. Even in the calibrated tightening mode, the bias in the near term is clearly towards holding rate steady.
 
"The decision to hold policy rates was mostly on the expected lines and without much ambiguity. Worries on the inflation front have reduced and a number of upside risks to the inflation path seem to be off the radar for now. Domestically, food inflation continues to surprise on the downside and with lackluster food procurement by the government, the upside risk to food inflation from higher MSPs appear contained for now. Globally, crude oil prices have shown significant downward movement and subdued global growth prospects may keep oil prices in check, though the risk from geopolitical risks has not abated. A strengthening of the rupee against the greenback has reduced imported inflation pressures. Also, a slowdown in domestic growth could keep core inflation contained," he opined.
 
Joshi is of the view that even as the MPC has stuck to its calibrated tightening stance, the possibility of another rate hike this fiscal appears to be low.
 
RBI said the gross domestic product (GDP) for 2018-19 is estimated at 7.4 per cent, with “risks somewhat to the downside”.

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