RBI’s Likely to Keep Repo Rate Unchanged

RBI’s Likely to Keep Repo Rate Unchanged

The Reserve Bank of India (RBI) is expected to keep interest rates unchanged in its second bi-monthly policy review scheduled for Wednesday, despite latest data showing significant plunge in both inflation and in the rate of economic growth.

Indian gross domestic product (GDP) growth during the fourth quarter ending March fell to a low of 6.1 percent, reflecting the impact of the November demonetization measure, according to data from the official statistician last week.

Meanwhile, retail inflation in the country during April decelerated to 2.99 percent, from 3.89 percent for March as food prices reported a massive plunge.

According to data furnished by the Ministry of Statistics and Programme Implementation under a new series April retail inflation rate based on the Consumer Price Index (CPI) was lower than 5.47 percent recorded during April last year. The Consumer Food Price Index (CFPI) during the month under review plunged to 0.61 percent as compared to 2.01 percent in March.

While holding its repo, or short term lending rate, at 6.25 percent at its previous policy review in April, the RBI had said “the decision of the monetary policy committee (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 inflation of 4 percent within a band of +/- 2 percent, while supporting growth.”

In its outlook going ahead, the central bank had highlighted the inflation risks, including from the monsoon uncertainties posed by El Nino, increased allowances related to the pay commission, one-off impact of the Goods and Services Tax (GST) implementation and global reflation risks.

“Another upside risks arises from the one-off effects of the GST,” the MPC’s April meeting minutes said, referring to the pan-India indirect tax regime proposed to be implemented from July 1.

The RBI has also been urging banks for further transmitting to customers the benefits of its earlier rate cuts. The banks, however, have been slow on transmission, blaming their high levels of non-performing assets (NPAs), or bad loans in this regard.

Meanwhile, Japanese financial services firm Nomura in a report said it expects the RBI rates to stay on hold until March 2018.

On the impact of the forthcoming GST, a major edible oils company said on Monday that traders are hesitant to stock inventory as usual “as there could be taxation hassles”.

“Due to this reason the flow of goods has slowed down and may result in slightly lesser output, and doubts are that edible oil industry could suffer at least initially,” Puri Oil Mills CFO Vipan Gupta said in a statement.

With the current low state of demand in the Indian economy, even an unlikely rate cut by the RBI would have no impact, according to economist Arun Kumar, formerly professor at Jawaharlal Nehru University here.

“The RBI is not likely to cut interest rates as these will have no impact. What the latest GDP figures don’t show are an even sharper fall in growth due to lack of demand. This means there is very low capacity utilisation, so how will a rate cut help,” he asks.

The RBI last cut its repo rate from 6.50 percent to 6.25 percent in October last. Since then it has maintained status quo through three successive policy reviews.

The six-member MPC, headed by RBI Governor Urjit Patel, begins its two-day meeting in Mumbai on Tuesday.

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