RBI Takes Neutral Stance, Keeps Policy Rates Unchanged | CORPORATE ETHOS

RBI Takes Neutral Stance, Keeps Policy Rates Unchanged

By: | February 7, 2018

Feb 7: Reserve Bank of India (RBI) has kept the policy repo rate unchanged at 6 percent and consequently the reverse repo rate remains at 5.75% and marginal standing facility (MSF) and Bank Rate at 6.25%.  The decision is consistent with the neutral stance of the monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 percent while support growth.

RBI noted that the CPI inflation excluding food and fuel increased further in November and December, largely on account of increase in housing inflation following the implementation of higher house rent allowances. Retail inflation measured by the CPI increased for the six consecutive month in December on a strong unfavourable base effect. The liquidity in the system continues in surplus mode but is moving steadily towards neutrality.

The December bi-monthly resolution projected inflation in the range of 4.3-4.7 per cent in the second half of 2017-18, including the impact of increase in HRA. In terms of actual outcomes, headline inflation averaged 4.6 per cent in Q3, driven primarily by an unusual pick-up in food prices in November. Though prices eased in December, the winter seasonal food price moderation was less than usual. Domestic pump prices of petrol and diesel rose sharply in January, reflecting lagged pass-through of the past increases in international crude oil prices. Considering these factors, inflation is now estimated at 5.1 per cent in Q4, including the HRA impact. 16. The inflati

The inflation outlook beyond the current year is likely to be shaped by several factors. First, international crude oil prices have firmed up sharply since August 2017, driven by both demand and supply side factors. Second, non-oil industrial raw material prices have also witnessed a global uptick. Firms polled in the Reserve Bank’s IOS expect input prices to harden in Q4. In a scenario of improving economic activity, rising input costs are likely to be passed on to consumers. Third, the inflation outlook will depend on the monsoon, which is assumed to be normal. Taking these factors into consideration, CPI inflation for 2018-19 is estimated in the range of 5.1-5.6 per cent in H1, including diminishing statistical HRA impact of central government employees, and 4.5-4.6 per cent in H2, with risks tilted to the upside