The Reserve Bank of India (RBI) in its second monetary policy review of this financial year kept the repurchase (repo) rate unchanged at 6.25 per cent. The central bank had last changed the policy rate on October 4, 2016, when the policy rate was cut by 25 basis points.
The apex bank left the reverse repo rate unchanged at 6 per cent after a surprise 25 basis points increase in April. The vote by the central bank’s monetary policy committee was 5-1, the first dissent in five meetings since the MPC was formed last September.
Global financial services firm BofA-ML believes RBI may slash repo rate by 25 basis points in August following a good monsoon outcome.
Here are the five key takeaways from RBI’s policy statement:
On GST implementation
According to RBI, the implementation of the GST is not expected to have any material impact on overall inflation. Headline inflation is projected in the range of 2-3.5 per cent in the first half of the year and 3.5-4.5 per cent in the second half. All goods and services have been put in slabs of 5, 12, 18 and 28 per cent, with the exception of gold and precious metals, which will attract 3 per cent GST.
Growth concerns
The projection of real GVA growth for 2017-18 has been revised 10 basis points downwards from the April 2017 projection to 7.3 per cent, with risks evenly balanced.
“The continuing remonetisation should enable a pick-up in discretionary consumer spending, especially in cash-intensive segments of the economy. Furthermore, the reductions in banks’ lending rates post-demonetisation should support both consumption and investment demand of households and stress-free corporates. Moreover, government spending continues to be robust, cushioning the impact of a slowdown in other constituents,” RBI said in a release.
Key risk factors
On the downside, global political risks remain elevated and could materialise, RBI said. Rising input costs and wage pressures may prove a drag on profitability of companies, pulling down overall GVA growth. The twin balance sheet problems — over-leveraged corporate sector and stressed banking sector — may delay the revival in private investment demand, it said.
Global trade
Merchandise exports posted double-digit growth in March and April 2017 in an environment of slowly improving global trade, with 80 per cent of this expansion contributed by engineering goods, petroleum products, gems and jewellery, readymade garments and chemicals. The level of foreign exchange reserves as on June 2, 2017 was $381.2 billion, RBI said.
Imports of petroleum and products rose strongly on price effects as international crude prices firmed up in the wake of OPEC’s productions cut. Gold imports also surged in volume terms, initially driven by seasonal and festival demand but subsequently by stockpiling in anticipation of the roll out of the goods and services tax (GST).
Neutral view
Monetary Policy Committee maintained a neutral stance and remain watchful of incoming data. “The decision of the 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 (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth,” the RBI said in a statement.
The RBI said it wanted to see more evidence that the easing of inflation seen in April would endure, citing for example, sticky core inflation due to rising rural wage growth and strong consumption demand. Inflation data for May will be released next week.
The next meeting of the Monetary Policy Committee (MPC) is scheduled on August 1 and 2, 2017.
Source: Economic Times
