Economic Development and Policies

RBI keeps key rates unchanged, raises inflation forecast

The Reserve Bank of India in its fifth bi-monthly policy review of the fiscal year announced on December 26, 2017 that it is keeping the key interest rates unchanged at 6%. The RBI also maintained its projection for FY18 real GVA (Gross Value Added) growth at 6.7 per cent, saying the risks are evenly balanced. The central bank’s decision to keep REPO rate unchanged was in line with the consensus estimate. A total of 52 of 54 economists surveyed by a Reuters poll had expected a status quo on the policy rate. The policy rate still stands at a seven-year low. The committee had last cut the key lending rate by 25 basis points in August this year.

 The six-member Monetary Policy Committee (MPC), which is headed by RBI Governor Urjit Patel, raised the inflation forecast to 4.3-4.7% in the third and fourth quarters of the current fiscal. Mr. Patel said the MPC took into account the “upward pressure on food and fuel prices”. He noted that there has been significant resource mobilisation in the primary capital market.  He also revealed that the central bank would rationalise merchant discount rates to widen the network of merchants using point-of-sale terminals. The REPO rate is the short-term lending rate. It is notable that 5 of six MPC members voted in favour of a status quo.  MPC member Ravindra H. Dholakia had voted for a policy rate reduction of 25 basis points. The RBI’s policy stance was in line with expectations, maintaining a word of caution on the upside risks emanating from high commodity prices, global financial instability, HRA related increases, rising input costs and fiscal slippages.

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