RBI keeps key rates unchanged

The Monetary Policy Committee (MPC), headed by RBI Governor Urjit Patel, started its 2-day meeting today amid little hope of cut in the key policy rate because of hardening global crude oil prices.

The growth will accelerate from 7.3-7.4% in first half of 2018-19 to 7.3-7.6% in the second of half of the current fiscal, said the first bi-monthly monetary policy statement for 2018-19. 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%.

The MPC sharply trimmed its April-September inflation projection to 4.7-5.1 percent, from a previous range of 5.1-5.6 percent that it released in February.

The decision helped extend a rally in the bond market, triggered last week by the government's decision to cut its first-half borrowing plans and after the RBI on Monday allowed lenders to spread their debt market losses over four quarters.

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RBI executive director and MPC member Michael Patra said that excluding HRA from the inflation basket can shave off 35 bps from headline price index. CPI which stood at 5.21% at 17-month high, recorded a growth rate of 5.07% in January 2018 and further to 4.44% in February 2018. Oil prices remain a risk however, with India importing roughly 80 percent of its crude requirements.

Additionally, export growth has started decelerating in recent months due to several factors like delays in getting goods and services tax refunds, shrinkage of trade finance, loss of competitiveness due to overvaluation of currency and rising trade protectionism (which was mentioned by the MPC as well). Analysts had predicted that RBI can afford to maintain a status quo along with neutral stance for sometime more.

Meanwhile, the same RBI statement on the end of its association with crypto dealings adds that the bank will be looking into creating its own state-backed cryptocurrency, "in addition to the paper currency that we have", Kanungo notes, with a report to be submitted on its feasibility by the end of June 2018.

Patel said fiscal slippages from the federal as well as state governments and a below-normal monsoon meant that risks to inflation were on the upside. The MPC also pared CPI for the second half of FY19 to 4.4 per cent from 4.5-4.6 forecast earlier. A lot depends on the lower repo as if there is a decrease recorded in the repo rate, then it helps in lowering the loan interest rates, which ultimately helps common people who have to pay back or are planning to take loans.

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