RBI sticks to it stand, refuses to lower interest rate; lowers inflation projection

The Reserve Bank on Wednesday, December 5, lowered retail inflation projection in the range of 2.7-3.2 % for the second half of the current fiscal year, citing normal monsoon and moderate food prices.

“The broad-based weakening of food prices imparts downward bias to the headline inflation trajectory going forward,”said the RBI informed in its fifth bi-monthly monetary policy announced here.

Meanwhile, the central bank-maintained status quo in monetary policy announcement, leaving the key repo rate at 6.50 % in its fifth bi-monthly policy review of 2018-19 Reverse repo, the rate at which the central bank borrows from banks -- was kept unchanged at 6.25 %t. However, the central bank cut the statutory liquidity ratio (SLR) by 25 basis points to 19.25 %.

It’s worth noting in its previous policy review in October, the apex bank had projected the retail inflation to be around 3.9-4.5% in the October-March period of 2018-19.

In contrast to the food prices, there has been a broad-based increase in inflation in non-food groups. International crude oil prices have declined sharply since the last policy and the price of Indian crude basket collapsed to below USD 60 a barrel by end-November after touching USD 85 a barrel in early October.

It was further added that other factors like lower rabi sowing may adversely affect agriculture and hence rural demand going forward. Financial market volatility, slowing global demand and rising trade tensions pose negative risk to exports. However, the decline in crude oil prices is expected to boost India’s growth prospects by improving corporate earnings and raising private consumption through higher disposable incomes.

“Retreat in energy prices has lead to a drop in inflation,” RBI Governor Urjit Patel said in post policy media briefing. Drop in crude oil prices may boost corporate earnings and domestic consumption, he added.

The RBI also cut its inflation projection for second half of FY19 to 2.7-3.2 % earlier after taking into consideration all factors and assuming a normal monsoon in 2019, inflation is projected at 2.7-3.2% in H2 FY 2018-19 and 3.8-4.2 % in H1 FY 2019-20, with risks tilted to the upside," the RBI stated.

It said the projected inflation path remains unchanged after adjusting for the HRA impact of central government employees as this impact dissipates completely from December 2018 onwards.

The RBI in its last policy review in October had kept rates on hold. However, it had changed its stance on key policy rates to 'calibrated tightening' due to uncertain global economic activity