The Reserve Bank of India (RBI) has kept the repo rate unchanged at 6.25% in its monetary policy review, citing inflation concerns after the first quarter of the next financial year, once the base effect vanishes.
* All the six members of the monetary policy committee voted in favour of the decision.
* Many economists expected further reduction in the repo rate, as retail inflation dropped to 3.41% in December – much lower than the central bank’s March end forecast of 5%.
* Now, the RBI has projected inflation in the range of 4.0 to 4.5% in the first half of the financial year and in the range of 4.5 to 5.0% in the second half.
* The central bank said in a statement that “Favourable base effects and lagged effects of demand compression may mute headline inflation in Q1 of 2017-18.”
* The central bank cited ‘three significant upside risks’ that impart some uncertainty to the baseline inflation path – the hardening profile of international crude prices; volatility in the exchange rate on account of global financial market developments, and the fuller effects of the house rent allowances under the 7th Central Pay Commission (CPC) award.
* The RBI lauded the Central government for its effort in maintaining fiscal discipline that could have a favorable impact on inflation. The focus of the Union budget on growth revival without compromising on fiscal prudence should bode well for limiting upside risks to inflation.
Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation.
Inflation: A general increase in prices and fall in the purchasing value of money.