RBI Keeps Repo Rate Unchanged at 6% Due to Inflation’s Shadow

Consecutively third time in a row, the Reserve Bank of India (RBI) kept its repo rate unchanged at 6% owing to fiscal deficit and firming inflation.

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RBI
RBI

The move does not come as a surprise for the industry experts when Reserve Bank of India (RBI) decided to keep its repo rate unchanged at 6% owing to Liquidity Adjustment Facility (LAF) on Wednesday. In addition to this, the reverse repo rate at which the central bank absorbs excess liquidity and borrows from banks remains same at 5.75%.

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The 6-member Monetary Policy Committee (MPC) said that the inflation outlook is clouded by several uncertainties on the upside the inflation outlook is clouded by several uncertainties on the upside”, flagging risks from 7th pay panel implementation in states, high oil prices, hike in customs duties and fiscal slippage to 3.5 per cent in 2017-18 and a higher target for 2018-19.

“Fiscal slippage as indicated in the Union Budget could impinge on the inflation outlook. Apart from the direct impact on inflation, fiscal slippage has broader macro-financial implications, notably on economy-wide costs of borrowing which have already started to rise. This may feed into inflation,” the committee added.

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Out of the six members, Chetan Ghate, Pami Dua, Ravindra H. Dholakia, Viral V. Acharya and Urjit R. Patel voted in support of the monetary policy decision. Executive Director Michael Debabrata Patra was the only one who voted to increase the policy rate by 25 basis points.

As the inflation is on the upward trend, hence, the industry experts had already assumed the rate to remain consistent. In December 2017, the inflation rate went up to 17 months high at 5.21% owing to surging food and oil prices opposite to the target of 4% set by RBI.

Considering all the facts, the Reserve Bank of India (RBI), for the fourth quarter of the fiscal year 2017-18, has predicted the inflation rate at 5.1%. In addition to this, the apex body has evaluated retail inflation to fluctuate between 5.1-5.6% for the first six months of the financial year 2018-19. It will then reduce subsequently to 4.6% in the remaining half.

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