In a meeting last week, the monetary policy committee (MPC) voted to keep the benchmark interest rate unchanged. As shown in Chart 1, the policy repo rate stands at six per cent. The decision, taken by a 5-1 vote, was expected by analysts. Headline retail inflation, as measured by the consumer price index, had risen to a seven-month high of 3.6 per cent in October. And, as shown in Chart 2, core inflation, which excludes food and fuel, continues to remain sticky.
The MPC now expects the inflation rate to rise during the second half of the year, ranging between 4.2 and 4.6 per cent, on account of an increase in house rent allowance (HRA) by the Centre. Other factors such as rising oil prices and the possibility of fiscal slippages are also keeping the committee on tenterhooks.
On the growth front, the committee expressed optimism. Economic activity rebounded in Q2FY18, with gross domestic product (GDP) growing at 6.3 per cent, up from 5.7 per cent in Q1, as shown in Chart 3.
The Reserve Bank of India (RBI) expects growth to rise to seven per cent in Q3 and further to 7.8 per cent in Q4. And, while investment as a ratio of GDP continues to fall, it has seen a pick-up in Q2, as shown in Chart 4.
While concerns over the monetary policy transmission mechanism remain, as shown in Chart 5, the marginal cost of funds based lending rate for banks has fallen sharply. But, despite this fall, bank lending, especially to industry, continues to remain depressed (Chart 6) on account of the twin balance sheet problem. As shown in Chart 7, gross non-performing loans continue to remain well over 10 per cent, suggesting limited capital available for lending. And on the industry front, the low capacity utilisation rates, shown in Chart 8, suggest demand continues to remain sluggish.