The Reserve Bank kept the repo rate- the rate at which the central bank lends to banks – unchanged at 6 per cent for the third consecutive time today in view of firming inflation.
The reverse repo rate, the rate it pays banks for parking surplus funds, is maintained at 5.75 per cent. All the other ratios remained intact.
However, it raised red flags about potential steep spike in prices, fiscal profligacy and the likely fallout of volatility in global financial markets.
"The decision of the MPC is consistent with the neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of 2 per cent, while supporting growth," the RBI said in a statement.
The Monetary Policy Committee (MPC), headed by RBI Governor Urjit Patel had last reduced the benchmark lending rate by 0.25 percentage points to 6 per cent last August, bringing it to a 6-year low.
In its December review, the MPC had kept the benchmark interest rate unchanged on concerns of a possible price rise but had left the door ajar for a rate cut in future.
Retail inflation crossed the RBI's comfort level and rose to 5.21 per cent in December on increase in prices of food items. The retail inflation, based on Consumer Price Index (CPI), was 4.88 per cent in November. In December 2015, it was 3.41 per cent.
The Monetary Policy Committee pegged CPI inflation in the range of 5.1-5.6 per cent for the H1FY19, factoring in the diminishing statistical HRA impact of central government employees. It projected 4.5-4.6 per cent in H2FY19, with risks tilted to the upside.
The real gross value added (GVA) growth as per the first advance estimates (FAE), on the other hand, is estimated to decelerate to 6.1 per cent in FY18 from 7.1 per cent in 2016-17, due mainly to slowdown in agriculture and allied activities, mining and quarrying, manufacturing, and public administration and defence (PADO) services.
Policy Committee is being challenged by many factors – from inflationary threat due to rising food prices, to higher government spending that would crowd out private investment, to high oil prices. The recent sell off in global financial markets is the latest headache to policy makers.
Following are key highlights of the RBI's 6th bi-monthly monetary policy statement
* Key lending rate (repo) unchanged at 6 pc;
* Reverse repo rate remains at 5.75 pc and marginal standing facility (MSF) rate and Bank Rate at 6.25 pc;
* Monetary policy's stance neutral;
* Petrol and diesel prices rose sharply in Jan, reflecting lagged pass-through of past increases in global crude prices;
* Retail inflation estimated at 5.1 pc in Q4 this fiscal and 5.1-5.6 pc in H1 of FY2018-19;
* Inflation likely to ease to 4.5-4.6 per cent in H2 of FY19;
* Gross Value Added (GVA) growth for FY18 seen at 6.6 percent;
* GVA growth for 2018-19 projected at 7.2 percent;
* GST stabilising, which augurs well for economic activity;
* Early signs of revival in investment activity;
* RBI seeks pick-up in credit growth due to recapitalisation of PSBs and resolution proceedings under IBC
* Export growth expected to improve further on account of improving global demand;
* RBI says focus of Union Budget on rural and infrastructure sectors a welcome development;
* Five members voted in favour of status quo in interest rate; one member voted for increase of 0.25 pc;
* Next meeting of the MPC on April 4 and 5.