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07-Dec2017

RBI maintains status quo for the second time in a row; raises inflation forecast

Maintaining status quo for the second time in a row, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has kept policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.0%. Consequently, 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%. But it also warned about lurking inflation worries in the New Year, amid signs that costlier food and fuel prices could pinch household budgets. 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.

In its Fifth Bi-monthly Monetary Policy Statement, 2017- 18, RBI has raised the inflation forecast for the next two quarters from 4.2-4.6% to 4.3-4.7% on rising crude oil and vegetable prices. However, it said that headline inflation has gone along the projections. The central bank factored in the Housing Rent Allowance (HRA) effect of up to 35 basis points, with risks evenly balanced, following the implementation of the 7th Pay Commission recommendations for central government employees. The impact of HRA is expected to peak in December. However, the staggered impact of HRA increases by various state governments may push up housing inflation further in 2018. It added that the recent rise in international crude oil prices may sustain, especially on account of the OPEC's decision to maintain production cuts through next year.

The RBI also said that the implementation of farm loan waivers by select states, partial roll back of excise duty and VAT in the case of petroleum products, and decrease in revenue on account of reduction in Goods and Services Tax rates for several goods and services may result in fiscal slippage with attendant implications for inflation. On the growth front, it said the economy could grow at 6.7% for the full year, maintaining its earlier forecast. In the third and fourth quarters, the GDP growth rates could be 7% and 7.8%, respectively.


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