Reserve Bank of India keeps policy repo rate on hold at 6 pct

The Indian central bank, Reserve Bank of India, kept its policy repo rate on hold at 6 percent today, as expected. Five members voted for the interest rate to remain on hold, while one member voted for a hike of 25 basis points.

Meanwhile, central bank downwardly revised its range estimates for headline CPI for FY2019. The RBI expects inflation to reach an average of 4.7 percent – 5.1 percent in the first half of this year and projects it to reach 4.4 percent in the second half of 2018. This marks a reduction from its February forecast of 5.1 percent to 5.6 percent in the first half and 4.5 percent to 4.6 percent in the second half. The downward revision is based on the assumption that food inflation is expected to be curbed if the monsoon season turns out to be normal along with effective food supply management by the government, noted ANZ in a research report.

The RBI repeated its earlier set of upside risks to inflation. These include: revised formula for minimum support prices for summer season agricultural crops; staggered effect of housing allowance revision by various state governments; possibility of fiscal slippage in FY2019; weak monsoons; and volatile crude oil prices.

Meanwhile, the Reserve Bank of India projects economic growth to strengthen to 7.4 percent in FY 2019 from 6.6 percent in FY 2018. Based on this projection, the Monetary Policy Committee noted that the output gap is closing but the long-term growth potential is likely to be strengthened by structural reforms. This suggests that the effect of growth on inflation should be contained, stated ANZ.

“Overall, we assess the tone of the policy to be less hawkish than our expectations. Accordingly, we continue to expect the RBI to hike policy repo rate by 25bps in August 2018”, added ANZ.

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