RBI keeps interest rates unchanged on inflation risks

"Despite last year's rate rise, there are misconceptions as to when consumers will actually see the results, particularly as some banks are failing to pass this on".

The Bank's judgement of total "slack" in the economy was unchanged at around 0.25 per cent.

By opting to hold interest rates despite its evinced concerns about the growing threat of inflation, the central bank has signalled it will do its bit to protect the nascent recovery underway in the economy. Since MCLR is more sensitive to policy rate signals, it has been made a decision to harmonise the methodology of determining benchmark rates by linking the Base Rate to the MCLR with effect from April 1, 2018, it said. Apart, MSF Rate & the Bank rate would be 6.25%. Moreover, to deepen the secondary market infrastructure, RBI has proposed streamlining of repo guidelines for government and corporate securities, merging of limits for exchange traded currency derivatives under a single limit in all exchanges, and publication of G-sec benchmark and forex reference rate by the FBIL.

The continuing rise in food and fuel prices pushed India's annual retail inflation rate over the five per cent mark in December 2017 to 5.21 per cent, from 4.88 per cent in November 2017.

On Thursday, the Bank of England (BoE) froze its key interest rate but cautioned that it could rise more quickly than expected so as to bring down high inflation. The broader NSE share index was marginally higher. The bank expects inflation to slow marginally to 2.2% by early 2020.

"With the economy seemingly now on a firmer footing, borne out by a modest upgrading of the 2018 GDP growth forecast in the Inflation Report and slack limited and diminishing, the MPC believes there is a reduced case to tolerate above target inflation".

We also need to be mindful that even as the fiscal deficit has stayed above 3 per cent, inflation has come down to some extent because the fiscal stance starting from 2014 has actually been on a downward trajectory. "This may feed into inflation", he said. The RBI is bound to keep the headline price rise number at 4% with a two percentage point leeway on either side.

A "good monsoon", as the RBI Governor said, would increase the disposable income of the farmers.

However, with central banks becoming increasingly committed to raising interest rates across the G10 sphere, the Australian yield premium could shrink over the coming year if the RBA does not also begin to look at raising interest rates. But any decision to move to raise rates, including by potentially shifting the RBI's stance to "tightening" from "neutral" won't be easy.

The central bank's six-member Monetary Policy Committee (MPC), in its Bi-monthly Monetary Policy Statement, 2017-18, noted that the GVA growth as per the first advance estimates (FAE) released by the Central Statistics Office (CSO) is estimated to drop to 6.1 percent in 2017-18 from 7.1 percent in 2016-17.

  • Zachary Reyes