RBI retains economic growth projection at 6.7 per cent for FY'18

Since the last policy in early October inflation as measured by the Consumer Price Index has accelerated inching closer to the 4% mark which is the central bank’s medium-term target

India's Central Bank, Wary on Inflation, Set to Keep Rates on Hold

RBI kept the repo rate unchanged at 6 per cent, reverse repo rate at 5.75 per cent and bank rate at 6.25 per cent. The banking sector stocks entered a negative territory ahead of the RBI's monetary policy decision as the stock market opened on Wednesday. The primary reason behind no change in policy rates reflects the Reserve Bank of India's focus on inflation control.

The policy review observed that the moderation in inflation, excluding food and fuel, that was witnessed in first quarter of 2017-18 has "by and large, reversed".

"The staggered impact of HRA increases by various state governments may push up housing inflation further in 2018, with attendant second order effects". There is a risk that this upward trajectory may continue in the near-term.

The central bank also said that the "recent rise in worldwide crude oil prices may sustain, especially on account of the OPEC's decision to maintain production cuts through next year".

"We don't expect the tone to be outright hawkish as the RBI might need to trim down its growth projections for FY18, which at current levels is optimistic", said Rao, who expects a hold on Wednesday and in February.

In this scenario, it stressed, any adverse shock due to geo-political developments could push up prices even further.

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The central bank is also likely to be concerned that the government may have a wider fiscal deficit in the fiscal year ending in March than the 3.2 percent target, raising the prospect New Delhi may have to sell more bonds.

In addition, the consumer price index (CPI), or retail, inflation for October rose to 3.58 per cent from 3.28 per cent in September.

The committee had last cut the lending rate by 25 basis points in August this year.

The RBI's neutral stance is in line with what most surveys had projected.

The minutes of the MPC's October meeting showed that one member, RBI executive director Michael Patra, called for the rate-setting panel to be prepared to raise rates in the coming months should inflation pressures harden.

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