The second bi-monthly monetary policy announcement of the fiscal from the Reserve Bank of India saw a status quo as far as the key policy rate is concerned. The repo rate remains at 6.25%.
Although conditions augured well for a rate cut with inflation remaining benign and growth being weak, the 6-member monetary policy committee that decides on the rate, opted to stick to status quo. Retail inflation had dropped to 2.99 per cent in April from 3.89 per cent in April. And the fourth quarter GDP numbers had dropped to a growth rate of 6.1 per cent as against 7 per cent in the earlier quarter.
It has however slashed the Statutory Liquidity Ratio or the percentage of deposits that banks have to park in government securities, by 0.5 per cent to 20 per cent, a move that would result in increased lending by banks.
This time the decision was not unanimous as was the case during the last one year. Five members voted in favour of the decision while one was against.
The Sensex was trading at 31,184.89, down 5.67 points or 0.02 per cent at about 2.35 pm.
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Caution on inflation
The RBI said in cautious tone that it remained to be seen whether the low inflation reading in April would endure. It noted with concern that there was a increased risk of fiscal slippages which could entail inflationary spillovers, with the announcement of loan waivers. It expressed confidence that the impending implementation of GST ( from July 1) was not expected to have any inflationary impact.
It noted that inflation has fallen below 4 per cent only since November 2016, and said that it remained focussed on its commitment to keeping headline inflation close to 4 per cent on a durable basis keeping in mind the output gap.
It noted, "The current state of the economy underscores the need to revive private investment, restore banking sector health and remove infrastructural bottlenecks. Monetary policy can play a more effective role only when these factors are in place. Premature action at this stage risks disruptive policy reversals later and the loss of credibility. Accordingly, the Monetary Policy Committee ( MPC) decided to keep the policy rate unchanged with a neutral stance and remains watchful of incoming data."
Fiscal slippages
The central bank, however, raised concerns over the possibility of fiscal slippages due to the farm loan waivers.
“The risk of fiscal slippages, which, by and large, can entail inflationary spillovers, has risen with the announcements of large farm loan waivers,” it said.
RBI cut the economic growth projection to 7.3 per cent for the current fiscal from 7.4 per cent earlier.
(With inputs from PTI)