Mumbai: As expected the RBI on Wednesday kept the repo rate unchanged at 6 per cent citing upside risk to inflation from food and fuel prices. While maintaining its neutral stance on monetary policy outlook, the Reserve Bank has raised upwards its inflation projection to 4.3 – 4.7 per cent from its previous forecast of 4.2-4.6 per cent for the second half of this fiscal year.
However, RBI retained its growth outlook for FY18 at 6.7 per cent despite the second quarter growth remaining lower than its estimates as it believes that the several reforms initiated by the government would help create a conducive environment for nurturing higher growth in the medium to long term.
“While arriving at this decision, the monetary policy committee (MPC) took note of the upside pressures from food and fuel prices on evolving cost of living conditions and inflation expectations. Our survey indicates that corporates are also contending with rising input cost conditions, and higher risks of pass through to retail prices in the near term. In addition, the committee expressed concerns about the implications for the inflation outlook from possible fiscal slippages and global financial instability heightening asset price volatility,” said Urjit Patel, governor, RBI.
Noting that the moderation in inflation excluding food and fuel observed in Q1 of FY18 has, by and large, reversed, RBI said there is a risk that this upward trajectory may continue in the near-term.
Additionally, the impact of house rent allowance by the central government is expected to peak in December. The staggered impact of HRA increases by various state governments may push up housing inflation further in 2018.
On its outlook for growth, RBI expressed optimism regarding a recovery in the coming quarters as credit growth has picked up in recent months and the recapitalisation of PSBs is expected to help further improve credit flows.
“While there has been weakness in some components of the services sector such as real estate, the RBI’s survey indicates that the services and infrastructure sectors are expecting an improvement in demand, financial conditions and the overall business situation in Q4,” RBI said.