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Financial News: India Central Bank Keeps Rates On Hold

India Central Bank Keeps Rates On Hold

06/07/2017 - 08:17:00 (RTTNews)

(RTTNews) - Despite easing growth and inflation, India's central bank kept its key repo rate unchanged for the fourth straight meeting and adopted a less hawkish tone on Wednesday.

At its second bi-monthly monetary policy meeting, policymakers of the Reserve Bank of India decided to maintain the repo rate at 6.25 percent and the reverse repo rate at 6.00 percent.

The bank had lifted the reverse repo rate by 25 basis points in April to narrow the gap with the repo rate.

The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term inflation target, while supporting growth, the bank said in a statement.

Five members of the MPC voted in favor, while a dovish member Ravindra Dholakia voted against the resolution.

The bank aims to keep inflation close to 4 percent on a durable basis keeping in mind the output gap. Policymakers said premature action at this stage risks disruptive policy reversals later and the loss of credibility.

Responding to questions from reporters regarding a meeting between the Finance Ministry and the rate-setting panel ahead of Wednesday's policy session, Governor Urjit Patel said that the meeting never took place as all policymakers declined the ministry's request.

Although the inflation is expected to rise over the coming months, the slightly softer tone of today's statement suggests that rate hikes may come onto the agenda later than initially thought, Shilan Shah, an economist at Capital Economics, said.

Headline inflation is projected in the range of 2.0-3.5 percent in the first half of the year and 3.5-4.5 percent in the second half.

Inflation slowed to 2.99 percent in April, below the central bank's target of 4 percent. The bank said it need to assess whether the unusually low momentum in April inflation will endure.

The bank observed that the easing of inflation excluding food and fuel may be transient in view of its underlying stickiness in a situation of rising rural wage growth and strong consumption demand.

Further, the April reading imparted considerable uncertainty to the evolving inflation trajectory, RBI said.

Inflation expectations among households for three months ahead and a year ahead, ticked down marginally.

The risk of fiscal slippages, which can entail inflationary spillovers, has increased with the announcements of large farm loan waivers, the RBI warned.

Nonetheless, the bank added that the implementation of the Goods and Sales Tax is not likely to have a material impact on overall inflation.

The economy had expanded only 6.1 percent in the three months to March. The bank revised down its GVA growth projection for 2017-18 by 10 basis points to 7.3 percent.

Risks to both inflation and growth outlook are evenly balanced, the bank said.

The continuing remonetization should enable a pick-up in discretionary consumer spending, especially in cash-incentive segments, the bank said. The reductions in lending rates post-demonetization should also support both consumption and investment.

In a separate communique, the bank said the Statutory Liquidity Ratio was reduced to 20.00 percent from 20.5 percent, with effect from June 24.

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