The Reserve Bank of India has raised the policy repo rate from 6 to 6.25% and consequently the reverse repo rate under the liquidity adjustment facility has risen to 6 percent and Bank Rate to 6.50 %.
The decision of the Monetary Policy Committee (MPC) is consistent with the neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth, according to RBI.
RBI pointed out that liquidity in the system remained generally in surplus during April-May 2018 and surplus liquidity was absorbed to the extent of Rs 496 bn on a daily net average basis due to increased government spending, especially in the second half of the month.
India’s exports have grown in April after a dip in March and decline in import growth due to fall in gold, precious stones import was more than offset by increase in crude oil prices.
India’s GDP growth for FY18 is estimated at 6.7% due to rise in private final consumption expenditure due to improved rural demand. Q4 GDP growth was 7.7%, the fastest pace in the last seven quarters.
On the supply side, estimates of agriculture and allied activities have been revised upwards, supported by an all-time high production of foodgrains and horticulture during the year. On a quarterly basis, agriculture growth increased sharply in Q4:2017-18. On April 16, the India Meteorological Department (IMD) forecast a normal south-west monsoon rainfall, which was reaffirmed on May 30. This augurs well for the agricultural sector.
Industrial growth also strengthened, reflecting the robust performance of manufacturing,which accelerated for three consecutive quarters in Q4. Capacity utilisation by manufacturing firms increased significantly in Q4:2017-18 as revealed in the latest round of the Reserve Bank’s order books, inventories and capacity utilisation survey (OBICUS). The output of eight core industries accelerated in April on account of a sharp expansion in coal production, which reached a 42-month peak.
Retail inflation, measured by the year-on-year change in the CPI, rose sharply to 4.6 per cent in April, driven mainly by a significant increase in inflation excluding food and fuel. Excluding the estimated impact of an increase in house rent allowances (HRAs) for central government employees, headline inflation was at 4.2 per cent in April, up from 3.9 per cent in March. Food inflation moderated for the fourth successive month, pulled down by vegetables due to lower than the usual seasonal increase in their prices, and pulses and sugar which continued to experience deflation. However, within the food group, inflation increased in respect of cereals, fruits, prepared meals, meat and fish.
In the view of the economic growth, inflation expectations and trends in global economy, the MPC has raised the policy rate to keep medium headline inflation rate target of 4%.