As widely expected, the Reserve Bank of India opted for status quo in key interest rates. It was third time in a row that the apex bank kept key repo rate, the rate at which it lends to banks, on hold at 6 per cent. Consequently, reverse repo rate at which it borrows from banks stands at 5.75 per cent. Interestingly, RBI tweaked with interest rates only once during the current fiscal year and that was in August when it reduced repo rate by 25 basis points from 6.25 per cent. That’s a clear indication as to how difficult it has been for six-member Monetary Policy Committee (MPC) to steer monetary policy this fiscal.
As in the recent past, inflation has played spoilsport this time too. According to latest official data, retail inflation rose to a 17-month high of 5.2 per cent in December last year, exceeding the RBI’s target of 4 per cent by miles. Rising crude oil prices and the government’s announcement in Union Budget 2018-19 of increasing minimum support price (MSP) for agriculture produce are expected to further push up inflationary pressures. RBI in its policy review on Wednesday pointed out that hike in house rent allowance (HRA) as per the Seventh Pay Panel recommendations also added fuel to the inflation fire. The apex bank also sounded alarm bells about fiscal deficit. “Fiscal slippage as indicated in the Union Budget could impinge on the inflation outlook,” it warned, forecasting inflation of 5.1-5.6 per cent for the first-half of next financial year.
On GDP front, RBI lowered growth forecast yet again for the current financial year. It now expects economy to expand by 6.6 per cent this fiscal, slightly lower than the earlier forecast of 6.7 per cent made in its December policy review. And the growth forecast for next fiscal now stands at 7.2 per cent. “There are early signs of revival in investment activity as reflected in improving credit offtake, large resource mobilisation from the primary capital market, and improving capital goods production and imports,” RBI said. But the apex bank seems to be overly optimistic on growth prospects. With interest rates still ruling high and crude oil prices rising, it’s unlikely that GDP growth will pick up pace in near term.