RBI has left the repo rate unchanged in order to keep inflation under check.
What transpired at the last MPC meet of the fiscal?
RBI’s “Monetary Policy Committee” met for its regular bi-monthly to consider and review the monetary direction ahead.
The Policy Outlook - Vigilance on price stability was stressed amid fresh price uncertainties and it was decided to leave the Repo Rates unchanged.
As inflation is at the fastest pace in 17 months, there wasn’t much ambiguity expected on the outcomes of the MPC meet.
Significantly, the MPC retained a ‘neutral stance’, which gives it the flexibility to change gears in either direction.
Inflation Stats - Consumer Price Index (CPI), which is the parameter on which inflation targeting is done, has accelerated for the 6th straight month.
The RBI had in December made a projection for inflation in the range of 4.3-4.7% in the six months through March 2018.
But as fuel prices having risen sharply in January, the estimates for the 4th quarter have been raised to 5.1%.
How does the scenario ahead look?
Projections beyond the current fiscal indicate a worsening inflation scenario, which is also clouded in multiple uncertainties.
The uncertainties - Staggered impact of increase in “House Rental Allowance” by various State governments, which may induce 2nd order effects.
The Budget’s proposed changes to the “minimum support price” norms for crops as well as the proposals to increase customs duty on a range of goods.
Fiscal slippage could also fan inflation and increase borrowing costs.
Optimism - The normalisation of monetary policy by advanced economies could spell a decisive end to global ‘easy money’ conditions.
While this may trigger some flight of capital from emerging markets like India, there are positives for the economy in term of pickup in global growth.
RBI also looks optimistic in its prediction that CPI inflation for the first half of the next fiscal will be in the 5.1-5.6% range before moderating to 4.5-4.6%,
But this is with the assumption that 2018 will have a normal monsoon, which one can only hope and never say with certainity.
Quick Facts
Monetary Policy Committee - It is a committee of the “Reserve Bank of India” that is responsible for fixing the benchmark interest rate in India.
It usually meets once in 2 months and is mandated to meet at least 4 times a year and it publishes its decisions after each such meeting.
The committee comprises six members – Three officials of the Reserve Bank of India and three external members nominated by the Government of India.
The Governor of RBI is the ex-officio chairperson of the committee and has a casting vote while taking decisions that are tied.
The current mandate of the MPC is to maintain inflation within the targeted range of 4%+2%, which is to be adhered till March 2021.
