The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) headed by RBI Governor Urjit Patel has kept the key policy rates unchanged. It was central bank’s sixth bi-monthly and last policy for the financial year 2016-17 and overall the third by the MPC. All six members of the MPC voted in favour of holding rates.
Besides, RBI also changed its stance from accommodative to neutral. It also lowered GDP growth forecast for the current fiscal to 6.9%. However the apex bank expects a rebound in GDP growth to 7.4% in 2017-18.
Current Policy Rates:
- Repo rate under the liquidity adjustment facility (LAF): Unchanged at 6.25 percent.
- Reverse repo rate under the LAF: Unchanged at 5.75 per cent.
- Marginal standing facility (MSF):Unchanged at 6.75 per cent.
- Bank Rate: Unchanged at 6.75 per cent
- Reserve Ratios Cash Reserve Ratio (CRR) of scheduled banks: Unchanged at 4.0 per cent of net demand and time liability (NDTL).
- Statutory Liquidity Ratio (SLR): Unchanged 20.75 per cent.
Highlights of 6th Bi-monthly Monetary Policy Statement 2017-18
Assessment of the Indian economy
- The advance estimates of the Central Statistics Office (CSO) released in January 2017 placed India’s real Gross Value Addition (GVA) growth at 7.0 per cent for 2017-18.
- Agriculture and allied activities posted a strong pick-up, benefiting from the normal south-west monsoon, robust expansion in rabi acreage and favourable base effects.
- In contrast, the industrial sector experienced a sharp deceleration, mainly due to a slowdown in manufacturing and in mining and quarrying.
- High frequency indicators point to subdued activity in the services sector, particularly automobile sales across all segments, domestic air cargo, railway freight traffic and cement production.
- Marking the fifth consecutive month of softening, retail inflation measured by the headline consumer price index (CPI) turned down sharper than expected in December 2016.
- Excluding food and fuel, inflation has been unyielding at 4.9 per cent since September 2016.
- Export growth remained in the positive zone for the fourth month in succession in December 2016.
- Imports other than petroleum oil and lubricants (POL) came out of the spike in November 2016 and moderated in December 2016.
- In contrast, there was an increase of over 10 per cent in POL imports, in part reflecting the rise in international crude oil prices.
Outlook for Indian economy
- Prices of pulses are likely to remain soft with comfortable supply conditions, while vegetable prices may potentially rebound as the effects of demonetisation wear off.
- Headline CPI inflation in Q4 of 2016-17 is likely to be below the 5 per cent.
- The focus of the Union budget on growth revival without compromising on fiscal prudence should bode well for limiting upside risks to inflation.
- GVA growth for 2016-17 is projected at 6.9 per cent with risks evenly balanced around it.
- Growth is expected to recover sharply in 2017-18 on account of several factors like rise in demand in view of re-monetisation.
- The emphasis in the Union Budget 2017-18 on stepping up capital expenditure and boosting the infrastructure in rural areas should contribute to growth. Accordingly, GVA growth for 2017-18 is projected at 7.4 per cent.