RBI keeps repo rate unchanged at 6.25%, lowers FY18 GDP projection to 7.3%

Statutory liquidity ratio was cut by 50 basis points to 20 per cent starting June 24

The Reserve Bank of India kept the repo rate and reverse repo rate unchanged at 6.25 per cent and six per cent, respectively, at Wednesday's monetary policy review, keeping in line with what analysts and experts had forecast. 

Statutory liquidity ratio (SLR) was cut by 50 basis points to 20 per cent starting June 24, in order to provide more liquidity to banks. 

The RBI cut the economic growth projection to 7.3 per cent for the current financial year from 7.4 per cent earlier.

The central bank's decision to leave the repo rate at a 6-1/2 year low had been expected by 56 of the 60 analysts surveyed by Reuters. RBI last changed the policy rate with a 25 basis points cut in October. The RBI last changed its reverse repo rate in April with a surprise 25 basis point increase.

The vote by the central bank's Monetary Policy Committee (MPC) was 5-1, the first dissent in the five meetings since the MPC was formed last September.

"The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of four per cent within a band of +/- 2 per cent, while supporting growth," the RBI said in its second bi-monthly policy review for 2017-18.

RBI, however,  softened its hawkish stance owing to fall in retail inflation to a record low and weak growth. The retail inflation in April was 2.99 per cent, well below RBI’s own target of four per cent.

The RBI lowered its inflation forecast for the current financial year.

Noting that inflation has fallen below four per cent only since November 2016, the MPC remained focused on its commitment to keeping headline inflation close to four per cent on a durable basis keeping in mind the output gap.

Stating that the "abrupt and significant" retreat in inflation in April would need to be assessed, the central bank in its policy statement said; "If the configurations evident in April are sustained, then absent policy interventions, headline inflation is projected in the range of 2.0-3.5 per cent in the first half of the year and 3.5-4.5 per cent in the second half."

The policy statement also said that the implementation of the goods and services tax is not expected to have a "material impact on overall inflation". However, the central bank cautioned that recently announced farm loan waivers had pulled up the risk of fiscal slippages, which could have an inflationary spillover. The central bank also called global political and financial risks, along with the disbursement of allowances under the 7th central pay commission’s award, upside risks.

"The MPC noted that incoming data suggest that the transitory effects of demonetisation have lingered on in price formations relating to salient food items, entangled with excess supply conditions with respect to fruits vegetables, pulses, and cereals," the statement said.
 

Markets continued trading flat as RBI held its rates at on expected lines. 

Rate sensitive stocks gained marginally after the RBI policy decision. Nifty Bank and Nifty auto were up 0.3 per cent and 0.5 per cent, respectively.

The next RBI MPC review will be held on August 1-2.