Rates unchanged will avoid further panic in domestic markets

Chief Economist HDFC Bank, Abheek Barua on Wednesday said the decision for the Reserve Bank of India (RBI) to keep the he repo rate and reverse repo rate unchanged at 6 percent and 5.75 percent respectively was done in view to avoid another bout of panic in the domestic markets.

"The monetary policy was, in our opinion, far less hawkish than expected given that RBI's inflation target had been busted, fiscal limits breached and uncertainty on critical prices such as oil and local food prices (specifically the MSPs of procured food items) has multiplied. Not only did the stance remain neutral, there were no indications of an imminent rate hike by the RBI," said Abheek Barua.

Adding to this he said that the governor chose not to discuss financial stability in detail despite the global financial market rout.

"This in our view was done carefully so as to avoid another bout of panic in domestic markets. Despite revising the trajectory of inflation up, the policy chose to remain neutral and this could mean that unless things go really awry (particularly in oil markets or the domestic fisc.) and push inflation way above the projected trajectory, the RBI could stay on hold for the next couple of policies. However, as global monetary policy tightens we see the chance of a domestic rate hike by the RBI to synchronise with the global cycle and this is likely to be in the last quarter of CY2018," added Barua.

"We also believe that the RBI will not respond hastily to any extreme prints that are the product of statistically driven effects such as a likely print of close to 6 per cent in June and prefer to look through them," he added.

The Reserve Bank of India (RBI) on Wednesday kept the repo rate and reverse repo rate unchanged at 6 percent and 5.75 percent respectively.

The central bank's six-member Monetary Policy Committee (MPC), in its Bi-monthly Monetary Policy Statement, 2017-18, noted that the GVA growth as per the first advance estimates (FAE) released by the Central Statistics Office (CSO) is estimated to drop to 6.1 percent in 2017-18 from 7.1 percent in 2016-17.