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India leaves key rate at 7-year low of 6%

Staff Writer | October 5, 2017
The Reserve Bank of India kept its benchmark interest rate steady at 6 percent on October 4th 2017.
Reserve Bank of India
Asia   Supporting growth
This is following a 25bps cut in August and in line with market expectations.

Policymakers said the decision is consistent with a neutral stance of monetary policy aiming to reach the medium-term target for inflation of 4 percent +/- 2 percent, while supporting growth.

The central bank also increased its inflation forecasts for October-March to a range of 4.2 percent to 4.6 percent while the gross value added projection was cut to 6.7 percent from 7.3 percent.

The reverse repo rate was also left on hold at 5.75 percent and the marginal standing facility rate and the Bank Rate at 6.25 percent.

Excerpts from the RBI Press Release:

"In August, headline inflation was projected at 3 percent in Q2 and 4.0-4.5 percent in the second half of 2017-18.

"Actual inflation outcomes so far have been broadly in line with projections, though the extent of the rise in inflation excluding food and fuel has been somewhat higher than expected.

"The inflation path for the rest of 2017-18 is expected to be shaped by several factors. First, the assessment of food prices going forward is largely favourable, though the first advance estimates of kharif production pose some uncertainty.

"Early indicators show that prices of pulses which had declined significantly to undershoot trend levels in recent months, have now begun to stabilise.

"Second, some price revisions pending the goods and services tax (GST) implementation have been taking place.

"Third, there has been a broad-based increase in CPI inflation excluding food and fuel.

"Finally, international crude prices, which had started rising from early July, have firmed up further in September.

"Taking into account these factors, inflation is expected to rise from its current level and range between 4.2-4.6 percent in the second half of this year, including the house rent allowance by the Centre.

"As noted in the August policy, there are factors that continue to impart upside risks to this baseline inflation trajectory...

"However, adequate food stocks and effective supply management by the Government may keep food inflation more benign than assumed in the baseline.

"Turning to growth projections, the loss of momentum in Q1 of 2017-18 and the first advance estimates of kharif foodgrains production are early setbacks that impart a downside to the outlook.

"The implementation of the GST so far also appears to have had an adverse impact, rendering prospects for the manufacturing sector uncertain in the short term.

"This may further delay the revival of investment activity, which is already hampered by stressed balance sheets of banks and corporates.

"Consumer confidence and overall business assessment of the manufacturing and services sectors surveyed by the Reserve Bank weakened in Q2 of 2017-18; on the positive side, firms expect a significant improvement in business sentiment in Q3.

"Taking into account the above factors, the projection of real GVA growth for 2017-18 has been revised down to 6.7 percent from the August 2017 projection of 7.3 percent, with risks evenly balanced."