RBI keeps rates unchanged; decides to wait and watch

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) at its second bi-monthly meeting today decided to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.25 per cent.

Consequently, the reverse repo rate under the LAF remains at 6.0 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 6.50 per cent, RBI stated.

RBI governor Urjit Patel on Tuesday said the risks which are yet to play out, including the progress of the monsoon, consumer inflation, input and wage costs and the rollout of the Goods and Services Tax (GST) could impact India's economy in coming months.

There are a lot of 'moving pieces' which need to be closely watched before the bank decides on the next policy action.

Also, while inflation retreated in April, it still looked uncertain that this trend will sustain.

The decision of the MPC is consistent with a neutral stance of monetary policy inconsonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth, RBI pointed out.

RBI said the decision is based on an assessment of the current and evolving macroeconomic situation.

Since the April 2017 meeting of the MPC, global economic activity has expanded at a modest pace, supported by firming growth in major advanced economies (AEs) and in some emerging market economies (EMEs) as well.

Economic growth in terms of real gross value added (GVA) has declined in the fourth quarter of the last fiscal, falling to 6.6 per cent from 7.1 per cent in the previous quarter and 0.1 percentage point lower than the second advance estimates released in February 2017.

This, according to RBI, has been due to a downward adjustment in services sector growth in Q4 for the constituents of construction, financial and professional services, and real estate.

International financial markets have been lifted by improving global growth prospects, broadly accommodative monetary policy stances of systemic central banks and generally positive incoming data. Increasingly, financial markets have shown resilience to geo-political events and have swiftly priced them in. This has been reflected in the reinvigoration of the reach for returns.