In a surprise move, India’s central bank, Reserve Bank of India (RBI) has maintained a status quo and kept the repo rate unchanged at 6.50 per cent after a momentary policy meeting which concluded on Friday (5).
However, the central bank changed its stance from ‘neutral’ to ‘calibrated tightening’ revising its inflation estimate on the upside.
RBI has also kept the reverse repo rate unchanged at 6.25 per cent after its fourth bi-monthly monetary policy meeting.
RBI’s decision surprised the markets as most of the analysts had predicted a 25 basis points (bps) rate increase following depreciating rupee and inflationary trends in the market due to jumping crude oil prices in the global market.
Meanwhile, the central bank has retained its gross domestic product (GDP) growth rate forecast at 7.4 per cent for the current fiscal year and added that the forecast may move up to 7.6 per cent in the financial year 2019-20.
“The decision of the Monetary Policy Committee (MPC) is consistent with the stance of calibrated tightening of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of four per cent within a band of +/- two per cent, while supporting growth,” RBI said in a release.
The MPC notes that global headwinds in the form of escalating trade tensions, volatile and rising oil prices, and tightening of global financial conditions pose substantial risks to the growth and inflation outlook. It is, therefore, imperative to further strengthen domestic macroeconomic fundamentals, RBI cautioned.
“…Both global and domestic financial conditions have tightened, which may dampen investment activity. Rising crude oil prices and other input costs may also drag down investment activity by denting profit margins of corporates. This adverse impact will be alleviated to the extent corporates are able to pass on increases in their input costs. Uncertainty surrounds the outlook for exports. Tailwinds from the recent depreciation of the rupee could be muted by the slowing down of global trade and the escalating tariff war,” the central bank said.
Based on an overall assessment, country’s GDP growth projection for 2018-19 fiscal year is retained at 7.4 per cent as in the August resolution (7.4 per cent in the second quarter and 7.1-7.3 per cent in the second half), with risks broadly balanced; the path in the August resolution was 7.5 per cent in second quarter of 2018-19 and 7.3-7.4 per cent in the second half.
GDP growth for first quarter 2019-20 is now projected marginally lower at 7.4 per cent as against 7.5 per cent in the August resolution, mainly due to the strong base effect, RBI noted.