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Industry disappointed as RBI keeps repo rate, stance unchanged (Roundup)

IANS  |  Mumbai 

Upside risks to led the RBI on Wednesday to keep its repo, or short-term lending rate for commercial banks, unchanged at 6.5 per cent for the second time in succession, even as Inc. expressed disappointment over the decision.

Consequently, the Reserve of India's (RBI) reverse repo rate has been maintained at 6.25 per cent, and the marginal standing facility (MSF) rate and the rate at 6.75 per cent.

Although the industry had expected RBI to maintain status quo in the lending rate during the fifth review, there were hopes of a change in stance due to the latest lower readings.

However, the RBI's committee (MPC) did not change the central bank's stance of "calibrated tightening" in the penultimate review of the current fiscal. The stance was adopted in the last policy review conducted in October.

The decision on keeping the policy rate unchanged was taken unanimously by the six-member MPC headed by RBI However, government nominee in the MPC, Ravindra Dholakia, voted to change the stance back to neutral.

According to the RBI, even as projections have been revised downwards, several uncertainties still cloud the inflation outlook.

"The MPC noted that the benign outlook for headline inflation is driven mainly by the

unexpected softening of and collapse in in a relatively short period of time," Patel said at the post-meeting press conference.

"Excluding food items, inflation has remained sticky and elevated, and the output gap

remains virtually closed."

Accordingly, the central believes that there are challenges like a sudden spike in prices of perishable food items, risks from revision in minimum support prices (MSPs) and rise in to inflation and inflationary outlook.

"RBI looks at the medium term target. Our projection for the inflation for the second quarter 2019-20 is 4.2 per cent, that is, over a one-year time frame which is higher than the medium-term target," RBI Deputy said in response to a question on inflation targeting and not changing the stance.

The RBI's MPC is mandated to achieve the medium-term target for CPI inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.

On the economic growth front, the RBI maintained its GDP projection for the current fiscal at 7.4 per cent as in the October policy, and at 7.5 per cent for the first half of 2019-20, "with risks somewhat to the downside".

"The MPC also noted that even as escalating trade tensions, tightening of global financial conditions and slowing down of global demand pose some downside risks to the domestic economy, the decline in in recent weeks, if sustained, will provide tailwinds," Patel said.

On the steps to increase liquidity, RBI announced a reduction of SLR (Statutory Liquidity Ratio) from the current 19.5 per cent of net demand and time liabilities (NDTL) to 18 per cent over a period of six quarters starting from the January-March 2019 quarter.

"The significant downward revision in inflation projections and assurance of continued durable liquidity was most reassuring to market participants in terms of a stable and predictable interest rate structure," said (SBI)

"On the development front, permitting non-residents to hedge their rupee interest risk is a welcome move providing the much-needed fillip to the 'Rupee Interest Rate Derivative' market."

Ratings agency ICRA's MD and Naresh Takkar: "At this stage, there does appear to be a significant chance of a change in the stance back to neutral in the February 2019 policy review."

"The announcement of continued open market operations to inject liquidity would complement the impact of the recent decline in the US 10-year yield and some stabilisation in at a moderate level."

Ratings and Economist said that till the time, RBI does not get convinced about the sustainability and continuance of the low inflation rate witnessed currently it is unlikely to change its policy stance from calibrated tightening to neutral.

He added that RBI's move to align liquidity coverage ratio (LCR) with SLR is a welcome move.

--IANS

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(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

First Published: Wed, December 05 2018. 22:16 IST
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