The Reserve Bank of India on Wednesday decided to keep interest rates unchanged.
The six-member Monetary Policy Committee voted 5-1 in favour of the move, which leaves the repo rate unchanged at 6% and the reverse repo rate at 5.75%. Only Ravindra Dholakia had voted in favour of a rate cut, reported Bloomberg Quint. The repo rate is the rate at which the RBI provides funds to banks.
The Central bank also slashed its growth outlook for the current year from 7.3% in August to 6.7%, though it raised its inflation forecast marginally.
“Turning to growth projections, the loss of momentum in Q1 of 2017-’18 and the first advance estimates of kharif foodgrains production are early setbacks that impart a downside to the outlook,” said the RBI. “The implementation of the GST [Goods and Services Tax] so far also appears to have had an adverse impact, rendering prospects for the manufacturing sector uncertain in the short term. This may further delay the revival of investment activity, which is already hampered by stressed balance sheets of banks and corporates.”
The RBI said that “teething problems” linked to the GST and bandwidth constraints would be resolved soon, thus improving economic growth in the second half of the financial year. But a rise in the costs of various inputs used in industrial production, and the inability of companies to significantl y raise the prices of their products may cause affect the firms’ profit margins, the Central bank said.
The bank added that implementation of farm loan waivers by several states may cause prices to rise. However, it said that the Monetary Policy Committee had resolved to keep the Consumer Price Inflation rate around 4%.
The RBI recommended that the government should focus on building more infrastructure, by restarting stalled infrastructure projects in the public sector. It said the Centre should increase the ease of doing business, including by further simplifying the GST. The Central bank also called for a faster rollout of the government’s affordable housing programme.
At its last policy meet in August, the RBI had cut its benchmark policy rates by 25 basis points to 6% from 6.25%, as expected by a majority of economists.
Icra says it expected RBI’s decision
Credit rating agency Icra on Wednesday said the RBI’s decision to not lower interest rates was expected. “As expected, the Monetary Policy Committee decided to leave the repo rate unchanged in a split vote and retain the neutral stance of monetary policy, whilst simultaneously reducing its forecast for economic growth,” Icra said in a statement.
After the committee’s decision to not cut interest rates, the RBI’s focus on inflation was clear, the agency said. Icra predicted that inflation will climb further and surpass the Monetary Policy Committee’s medium-term target of keeping it around 4%. The ratings agency said the central bank could cut the interest rates to 5.75% in the remaining months of the year.
Icra added that domestic consumption would drive economic growth in the remainder of the financial year, but an increase in investment activity remains “elusive”.