RBI: Growth to accelerate, but inflation threat looms

A Nissan dealership in Sunderland where the carmaker operates Britain's biggest plant. REUTERS  Andrew Yates  File

A Nissan dealership in Sunderland where the carmaker operates Britain's biggest plant. REUTERS Andrew Yates File

The repo rate - or the rate at which the RBI lends to other banks - has been kept unchanged at 6 per cent.

India's central banking institution Reserve Bank of India (RBI) kept its key lending rate unchanged after its monetary policy review Wednesday, officials said. "However, as global monetary policy tightens, we see the chance of a domestic rate hike by the RBI to synchronise with the global cycle and this is likely to be in the last quarter of calendar year 2018", said Abheek Barua, chief economist at HDFC Bank. While RBI's policy stance reduces the likelihood of rate cuts by lenders, Bank of Baroda turned out to be an outlier, reducing its benchmark rate for below one-year tenures by 15-25bps.

RBI has projected inflation for the fourth quarter to be 5.1 per cent, which is significantly higher than the 4.3- 4.7 per cent range that it had forecasted at its earlier meeting in December 2017.

The Reserve Bank cited hardening USA bond yields, fluctuating global crude oil prices and possible slippage of the government's fiscal consolidation targets as reasons for not changing lending rates.

Bank policymakers voted unanimously to keep interest rates on hold at 0.5% at their latest meeting.

Nevertheless, inflation is seen by the Bank as having already peaked at around 3.1 per cent, with the impact of the slump in sterling in the wake of the Brexit vote now fading.

Although inflation has been running well above its 2 percent target, the BoE has raised rates only once so far since the 2007-09 financial crisis - in November - while the U.S. Federal Reserve has raised them five times.

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The resolution of the 6-member MPC said "the inflation outlook is clouded by several uncertainties on the upside", flagging risks from 7th pay panel implementation in states, high oil prices, hike in customs duties and fiscal slippage to 3.5% in 2017-18 and a higher target for 2018-19.

The weighted average call rate is below policy rate, your stance is neutral, rates are unchanged, but the bond yields are rising very sharply.

Rob Clifford, commercial director at SDL Group, said: "I think it's likely that a hike in rates will happen a shade sooner than first anticipated, but I question if that is going to have the negative impact many fear". For the Modi government, it is yet another sign that its populist budget may not help push the growth pedal.

The (MPC) of the RBI will announce the policy rates at the end of its two-day meet later today.

But Mr Carney said rates would need to rise sooner and by more than expected at the time of the Bank's last forecasts in November to get inflation back to target.

These are the three main reasons why the RBI did not change repo rate on 7 February.

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