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RBI warns Budget 2018 may feed inflation as rates left on hold

Five on the six-member monetary policy committee voted for the decision, with one seeking a hike

Anirban Nag | Bloomberg 

RBI, Reserve Bank of India

India’s central bank kept interest rates unchanged for a third straight meeting and warned that higher government spending could feed into inflation that it forecasts will accelerate.

The benchmark repurchase rate will stay at 6 percent, the said on Wednesday, as predicted by 32 of 33 economists in a Bloomberg survey. It kept a neutral stance. Five on the six-member voted for the decision, with one seeking a hike.

While India’s budget is set to stoke demand, worsening public finances may crowd out private funding and investment, the central bank said in a statement. "The committee is of the view that the nascent recovery needs to be carefully nurtured and growth put on a sustainably higher path through conducive and stable macro-financial management."

Key points from the statement:

"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."

Inflation for the first half of the year starting April 1 is forecast at 5.1 percent to 5.6 percent; 4.5 percent to 4.6 percent for the second half with risks tilted to the upside

stays committed to keep headline inflation close to 4 percent

Gross value added -- a key measure of growth -- will increase 7.2 percent next fiscal year with risks evenly balanced.

"At this juncture we are on a prolonged pause in rate action until 2018," said Shubhada Rao, chief economist at Yes Bank Ltd. in Mumbai.

Borrowing Plan

The yield on the benchmark 10-year bond fell two basis points to 7.55 percent in Mumbai after the decision. The rupee advanced 0.2 percent to 64.1375 per dollar. Sovereign bonds have entered their seventh month of selloff, the longest losing streak since 1998.

The is sandwiched between the need to keep borrowing costs low -- as the government’s debt manager it has to sell a near-record $95 billion of bonds in the year starting April 1 -- as well as curb prices. Inflation hit a 17-month high of 5.2 percent in December.

Nevertheless, inflationary fears have proved unfounded in the past and some government advisers argue high real rates of interest are holding India back from achieving its potential.

The government forecasts gross domestic product will grow 6.5 percent in the year to March 31, down from 7.1 percent a year earlier. Slowing growth has hurt revenue just when the government needs to win back voters angry about a lack of jobs and rising farm distress. Modi’s administration this month said it will breach its deficit targets for the current financial year and the next.

First Published: Wed, February 07 2018. 15:12 IST