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RBI's MPC keeps repo rate unchanged at 6.25%
08
Feb '17
In its sixth Bi-monthly Monetary Policy Statement, 2016-17, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has decided to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.25 per cent. The reverse repo rate remains unchanged at 5.75 per cent, and the MSF rate and the Bank Rate at 6.75 per cent.

“The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving consumer price index (CPI) inflation at 5 per cent by Q4 of 2016-17 and the medium-term target of 4 per cent within a band of +/- 2 per cent, while supporting growth,” the RBI said in a statement.

Explaining the main considerations underlying the decision, the MPC said it is of the view that the persistence of inflation excluding food and fuel could set a floor on further downward movements in headline inflation and trigger secondorder effects. Nevertheless, headline CPI inflation in Q4 of 2016-17 is likely to be below 5 per cent. Favourable base effects and lagged effects of demand compression may mute headline inflation in Q1 of 2017-18. Thereafter, it is expected to pick up momentum, especially as growth picks up and the output gap narrows. Moreover, base effects will reverse and turn adverse during Q3 and Q4 of 2017-18. Accordingly, inflation is projected in the range of 4.0 to 4.5 per cent in the first half of the financial year and in the range of 4.5 to 5.0 per cent in the second half with risks evenly balanced around this projected path.

In this context, the MPC notes three significant upside risks that impart some uncertainty to the baseline inflation path – the hardening profile of international crude prices; volatility in the exchange rate on account of global financial market developments, which could impart upside pressures to domestic inflation; and the fuller effects of the house rent allowances under the 7th Central Pay Commission (CPC) award which have not been factored in the baseline inflation path.

However, the focus of the Union budget on growth revival without compromising on fiscal prudence should bode well for limiting upside risks to inflation, the Committee said.

The MPC said it remains committed to bringing headline inflation closer to 4.0 per cent on a durable basis and in a calibrated manner. This requires further significant decline in inflation expectations, especially since the services component of inflation that is sensitive to wage movements has been sticky. The committee decided to change the stance from accommodative to neutral while keeping the policy rate on hold to assess how the transitory effects of demonetisation on inflation and the output gap play out.

The MPC added that it believes that the environment for timely transmission of policy rates to banks lending rates will be considerably improved if (i) the banking sector’s nonperforming assets (NPAs) are resolved more quickly and efficiently; (ii) recapitalisation of the banking sector is hastened; and, (iii) the formula for adjustments in the interest rates on small savings schemes to changes in yields on government securities of corresponding maturity is fully implemented.

The next meeting of the MPC is scheduled on April 5 and 6, 2017. (RKS)

Fibre2Fashion News Desk – India


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