Mumbai: Signalling an end to the rate cut cycle that started in January 2015, the Reserve Bank of India (RBI) on Wednesday decided to keep its key policy rate unchanged, citing an elevated risk to inflation and shifted its stance from ‘accommodative’ to ‘neutral’.
Noting that the rise in global commodity prices especially fuel and metals along with the volatility in the exchange rates on account of global financial market developments would impart significant pressure on domestic inflation, RBI said the ‘neutral’ stance would give it sufficient flexibility to move in either direction of the interest rate cycle.
“Transient factors including anecdotal evidence on fire sales of perishable goods have discoloured an objective assessment on inflation pressures. For example, if vegetables are excluded, the CPI inflation would exceed the CSO official print for the month of December, which was of 3.4 per cent by as much as 140 basis points. In this highly uncertain condition, the monetary policy committee exercised abundant prudence in keeping the policy rate on hold,” said RBI governor Urjit Patel, adding that the bank is awaiting a clear and unbiased assessment of inflation.
Accordingly, the policy repo rates, the rate at which Reserve Bank lend funds to banks, remains unchanged at 6.25 per cent. However, Mr Patel pointed out that there is enough scope for banks to lower interest rates as the policy rates have dropped 175 basis points since the beginning of 2015 whereas the weighted average lending rates have come down by only 85-90 basis points.
While RBI has revised downwards its FY17 GDP growth projections to 6.9 per cent from 7.1 per cent, it said the growth is likely to accelerate to 7.4 per cent in FY18, as the discretionary consumer demand held back by demonetisation would bounce back in coming months.
The RBI believes that the reduction in the marginal cost based lending rates (MCLR) announced by banks post demonetisation would help in reviving consumption and investment demand. Additionally, the growth is expected to find further support from the higher budgetary allocation towards rural, infrastructure and affordable housing segments.
