RBI Keeps Rates Unchanged, Slashes Growth Forecast

India’s monetary policy committee on Wednesday voted to keep interest rates unchanged and maintained a neutral stance, suggesting that any further rate cuts are not a given. The RBI slashed its growth outlook for the current year, but raised its inflation forecast marginally.

The MPC voted to keep the repo rate unchanged at 6 percent. The reverse repo rate remains unchanged at 5.75 percent. The decision was taken by a 5-1 vote with Ravindra Dholakia voting in favour of a rate cut.

The decision to maintain status quo came despite a steep cut in the RBI’s forecast for gross value added growth for the current year. The GVA growth forecast has been cut to 6.7 percent for FY18 compared to 7.3 percent earlier.

Painting a picture of the economic conditions, the RBI said that slowing consumption demand and exports have added to weak investment activity.

“Aggregate demand has been impacted by slowing consumption demand, still subdued investment and a slump in export performance in the early months of 2017-18. Manufacturing activity, which was dragged down by one-off effects of the implementation of GST, weighed heavily on aggregate supply conditions…” the RBI said in its accompanying Monetary Policy Report.

Calls for a rate cut had grown louder after GDP growth fell to 5.7 percent in the first quarter of the current fiscal. High frequency indicators, have suggested some rebound in industrial activity since then. The RBI said, it expects the services sector to provide a counterbalance to persisting weak industrial growth. For next fiscal year, the RBI has forecast GVA growth of 7.4 percent.

Inflation, meanwhile, has picked up.

The RBI now expects CPI inflation to pick up to 4.2 percent in Q3FY18 and 4.6 percent in Q4FY18, a mild upward revision from its earlier forecast of 3.5-4.5 percent inflation in the second half of the year.

Fiscal slippage could add to these concerns. A 50 basis point expansion in fiscal deficit in FY18 could push up inflation by 25 basis points above baseline scenario, the RBI noted. In the April-August period, the government has used up 96 percent of its fiscal deficit target. Speaking at the post policy press conference, RBI Governor Urjit Patel said India should be “very cautious” with fiscal actions.

Drawing attention to the persistent lack of investment demand in the economy, the RBI said that it is “imperative to reinvigorate investment activity”, which in turn, would revive the demand for bank credit.

Monetary Policy Report: On Growth

• Real gross value added growth forecast at 6.7 percent in FY18 compared to 7.3 percent earlier
• Real GVA growth may rebound to 7.4 percent in FY19
• Economic activity is expected to recover with an improvement expected in the services sector
• Services sector to counterbalance persistent weakness in industrial production
• Consumer confidence dipped in the September 2017 round of RBI’s survey

Monetary Policy Report: On Inflation

• CPI inflation expected to pick up to 4.2 percent in Q3FY18 and 4.6 percent in Q4FY18
• Inflation is expected to pick up from recent lows due to adverse base effect and increased house rent allowance
• Broad based rebound in various underlying measures of inflation in April-July period
• GST rate structure could have an impact of up to 10 basis points on CPI inflation

Monetary Policy Report: On Fiscal Deficit

• Upside risks to fiscal deficit from possible measures to boost domestic demand and from lower revenues
• A 50 basis point expansion in fiscal deficit in FY18 could push up inflation by 25 basis points above baseline scenario

Monetary Policy Report: On Output Gap

• Output gap has remained mostly negative over the last two years
• Subdued credit growth has contributed negatively to demand conditions