RBI holds repo rate, but changes stance to 'calibrated tightening' (Second Lead)

  • Facebook
  • Twitter
  • Reddit
  • Flipboard
  • Email
  • WhatsApp

Mumbai : Belying market expectations of a hike, the RBI on Friday held its key lending rate unchanged in the context of an uncertain global economic scenario but turned hawkish, moving to a "calibrated tightening" from the "neutral" stance it has maintained over its six previous policy reviews.

Announcing the fourth bi-monthly policy review of the fiscal, Reserve Bank of India (RBI) Governor Urjit Patel said the Monetary Policy Committee (MPC) has decided to keep the repo, or the short term lending rate for commercial banks, unchanged at 6.5 per cent.Elaborating on the change to "calibrated tightening", the Governor said that it implied that "in this cycle, a rate cut is not the table and we are not bound to increase rates every time we meet.""With this stance we have two options, we can either increase rates or hold them," he said.A "neutral" stance allows the RBI to move either way on rates.In August, the RBI had hiked its repo rate by 25 basis points to 6.50 per cent citing upside risks to inflation."The reverse repo rate under the liquidity adjustment facility (LAF) remains at 6.25 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 6.75 per cent," the RBI monetary policy statement said."The decision of the 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 4 per cent within a band of +/- 2 per cent, while supporting growth," it added.Elaborating on the decision to hold the repo rate, Patel said that "actual inflation outcomes, especially in August, were below projections as the expected seasonal increase in food prices did not materialise and inflation excluding food and fuel moderated."Food inflation has remained unusually benign, which imparts a downward bias to its trajectory in the second half of the year. Inflation in key food items such as pulses, edible oils, sugar, fruits and vegetables remains exceptionally soft at this juncture."Retail inflation in August increased 3.69 per cent, slowing from 4.17 per cent in the previous month.Taking various factors into account, the RBI has lowered its inflation projection for the July-September quarter to 4.0 per cent, and between 3.9-4.5 per cent for the second half of the fiscal "with risks somewhat to the upside."THe RBI said the inflation outlook is clouded with several uncertainties."First, the government announced in September measures aimed at ensuring remunerative prices to farmers for their produce. Secondly, oil prices remain vulnerable to further upside pressures, especially if the response of oil-producing nations to supply disruptions from geopolitical tensions is not adequate," it said.The recent excise duty cuts on petrol and diesel will moderate retail inflation. Thirdly, volatility in global financial markets continues to impart uncertainty to the inflation outlook."Fourthly, a sharp rise in input costs, combined with rising pricing power, poses the risk of higher pass through to retail prices for both goods and services."According to RBI, since the last MPC meeting in August, global economic activity has remained resilient in spite of ongoing trade tensions, but is becoming uneven and the outlook is clouded by several uncertainties."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," it said.Five members of the MPC, including the GOvernor voted for status quo, while one voted for a 25 basis point hike in the repo rate.

Published : Friday, October 05, 2018 17:00 [IST]
  • Facebook
  • Twitter
  • Reddit
  • Flipboard
  • Email
  • WhatsApp
For more news and latest updates like us on Facebook, follow us on Twitter