Mumbai: As widely expected, the Reserve Bank of India (RBI) on Wednesday kept its key policy rate unchanged while retaining its stance of calibrated tightening of monetary policy despite a sharp downward revision in its inflation projection for the rest of the fiscal.
The Monetary Policy Committee (MPC) kept its policy repo rate unchanged at 6.5 per cent and the reverse repo rate at 6.25 per cent. However, it has proposed to to reduce the statutory Liquidity Ratio (SLR) by 25 basis points every calendar quarter until the SLR reaches 18 per cent of net demand and time liabilities (NDTL). This will increase liquidity in the banking system.
While there has been a sharp drop in oil and food prices since its October policy, RBI said it wants to ascertain the durable nature of the recent inflation softening before taking any future policy actions.
Noting that the actual inflation outcome in Q2FY19 at 3.9 per cent was marginally lower than the projection of 4 per cent and the October inflation print at 3.3 per cent turned out to be unexpectedly low, the MPC revised downwards its inflation projection for the second half of FY19 to a range of 2.7 per cent – 3.2 per cent from 3.9 per cent – 4.5 per cent with risk tilted to the upside.
Turning to domestic growth, the MPC sounded optimistic and retained its FY19 forecast of 7.4 per cent although global economic activities were showing signs of weakness.
“On balance the MPC was of the view that incoming data will help ascertain the durable nature of recent inflation softening and allow better judgement on future policy actions. Hence given the assessment that growth will likely remain healthy for the rest of the year, the MPC retained its stand of calibrated tightening so as to buy time to pause reflect and undertake future policy action with more robust inflation signals. If the upside risks we have flagged do not materialise or are muted in their impact as reflected in the incoming data, there is a possibility of space opening up for commensurate policy actions by the MPC,” said Urjit Patel, governor, RBI.
