India Maintains Interest Rates; Cuts Growth Outlook

Mumbai: The Reserve Bank of India on Wednesday kept the benchmark repo rate unchanged at 6 per cent – the lowest in nearly in seven years – while taking forward its neutral policy stance.

The Reserve Bank of India on Wednesday slashed its forecast for real economic growth to 6.7% this fiscal year ending March, from its prediction of 7.3% in August. “The Monetary Policy Committee has chose to keep the rates unchanged and keep the stance neutral and monitor incoming data closely”, an RBI statement said after the MPC meeting in Mumbai.

The MPC voted 5-1 in favour of leaving the policy repo rate unchanged.

“Domestic indices edged higher buoyed by PSUs after RBI made a decision to maintain status quo on repo despite a cut in the growth forecast”, said Anand James, Chief Market Strategist, Geojit Financial Services Ltd. RBI has highlighted risks from inflation which were known.

“This coupled with recent trends in the global economy – spike in crude oil and the weakening of the rupee – has forced the RBI to take a calculated decision to keep the rate unchanged”, said Sankaranarayanan.

Pulled down by sluggish manufacturing, growth in the Indian economy, during April to June, fell to 5.7 percent, clocking the lowest GDP growth rate under the Narendra Modi dispensation.

In the event of inflation, central banks increase repo rate as this acts as a disincentive for banks to borrow from the central bank.

In the last monetary policy review, the RBI slashed the repo rate by 25 basis points to 6 per cent. Not that a 25-basis-point reduction in the rate at which the central bank lends short-term money to banks would galvanise the somnolent credit market or revive comatose investment.

Bankers however are of the view that the Reserve Bank of India (RBI) would maintain status quo as inflation has risen.

The central bank had earlier estimated India’s GVA in 2017-18 to grow at 7.3 per cent.

The fourth bi-monthly monetary policy statement for 2017 -18, to be released on Wednesday, is being keenly awaited by all stakeholders – especially the industry which has been demanding for lower interest rates. The Plot Ahead Mint Road pointed out actual inflation outcomes so far have been broadly in line with projections, though the extent of the rise in inflation excluding food and fuel has been somewhat higher than expected.

However, when asked if an addition of 100 bps to inflation may result in no rate cut, Patel said inflation risks are balanced on both sides and pointed to the positive factors like a possible dip in commodity prices and food inflation staying under control.

The move sent bonds sharply lower due to worries about more supply, but the rupee and stock markets rose.

The RBI said that the cyclical slowdown that set in at the beginning of last fiscal pulled down the economic growth in first quarter of the current fiscal.

With consumer inflation at 12.3 per cent in August (significantly higher than the policy target of eight per cent), the Monetary Policy Committee of the Bank of Ghana has also kept its policy rate of 21 per cent unchanged after its September 2017 meeting citing among other reasons further strengthening of the U.S. dollar following the monetary policy normalisation in the USA.