Repo rate retained at 6%; RBI lowers growth rate at 6.7%

The Reserve Bank of India on Wednesday kept the key interest repo rate unchanged and lowered the country’s economic growth forecast for 2017-18, and raised inflation projections leaving a little room for further rate cuts.

The economic growth forecast was reduced to 6.7% for the fiscal year ending March 2018 and inflation projection was upped at 4.6%. Repo rate or the rate at which the RBI lends to banks remained at 6% but the SLR, the portion of deposits held by banks in government securities, was reduced to 19.5% from the earlier 20%.

The status quo on repo rate is unlikely to hit housing and industrial loans in a big way as the central bank reduced the Statutory Liquidity Ratio (SLR) by 50 basis points leaving around Rs 57,000 crore more in the hands of banks for further lending.

Maintaining a neutral stance on further rate cuts, the bank said it expected retail inflation to rise to the levels of 4.2%-4.6% by March 2018. The central bank also expected the retail inflation to stay between 4.5% and 4.9% through the next financial year ending March 2019. Retail inflation, which directly effects the common man, stands at 3.6% now.

The bank said that the farm loan waiver to states and their implementation of revised salary and housing allowances following the 7th pay commission awards are the factors which will fan inflation in coming months. “The Monetary Policy Committee has decided to keep the rates unchanged and keep the stance neutral and monitor incoming data closely,” an RBI statement said after the MPC meeting in Mumbai.

The finance ministry, which was expecting a cut in the interest rates, merely said it had taken note of the MPC to keep rates unchanged. But the stock market gave a thumbs-up to the status quo on rates. The Sensex, Nifty and Rupee – all gained strength after the fourth bi-monthly policy review.

Talking to reporters after the end of two-day MPC meeting, RBI Governor Urijit Patel warned the government to be cautious about its proposed fiscal stimulus. “We should be very cautious lest fiscal actions undercut the macroeconomic stability,” the governor said.

It, however, expressed hope that the “teething problems” linked to the GST could get resolved relatively soon allowing economic growth to pick up in the second half. India’s GDP growth has plummeted to 5.7% in the April-June quarter from 8% earlier.