RBI keeps key rates unchanged, raises inflation forecast slightly

RBI keeps key rates unchanged, raises inflation forecast slightly

"In arriving at this decision the MPC took note of upward pressure on evolving cost of living conditions and rising input costs conditions which pose risks of pass through in retail prices", said Urjit Patel, governor, RBI.

The regulator has also capped commissions on debit card transactions in line with the government's agenda of pushing digital transactions.

At the December 6 policy meeting also, Dholakia voted for 25 basis points cut in policy rate as the MPC made a decision to keep the rate unchanged. Consequently, the repo rate remains unchanged at 6%, the reverse repo rate at 5.75% and Marginal Standing Facility (or MSF) rate & Bank rate at 6.25%. This, along with fears of fiscal slippage, has led to hardening of yields on bonds.

A majority of the 20 participants in an ET poll had expected rates to remain unchanged. Similarly, when banks need money they approach the RBI.

Market responses were mixed. BSE banks constituting 10 key banking stocks traded at 114 points or 0.40 per cent lower at 28,345 level. The rupee lost 0.2% to close 64.52 to the dollar. Among the 6 members of the MPC, only Dr. Ravindra Dholakia voted for a 25 basis points reduction in rates while the other 5 members voted for a status quo. One basis point is one-hundredth of a percentage point.

"Both growth and inflation are headed higher, but we expect rates to be on hold through 2018 as the RBI has a sufficient real rate cushion to absorb higher inflation", said Sonal Varma, economist at Nomura Securities. The central bank said it would track economic growth and inflation data, adding that risks to both "evenly balanced".

The decision on the MPC was not unanimous.

The panel noted several factors that could push growth in the coming quarters such as the amount of funds raised from the capital markets, the improvement in the ease of doing business rankings, large distressed borrowers being referred for bankruptcy proceedings and the government's Rs2.11 trillion bank recapitalisation programme. The MPC in its statement said that while inflation was expected to be marginally more than envisaged in October, growth as measured by gross economic value (GVA) would rise in the current fiscal by 7 per cent and 7.8 per cent in Q3 and Q4 respectively.

The finance ministry said the policy acknowledged that prices have been kept in check as well as the effectiveness of government reform measures.

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