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Interest Rates Unchanged - Monetary Policy Review

iasparliament
December 06, 2018
8 days
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Why in news?

The Reserve Bank of India decided to leave interest rates unchanged in the recent monetary policy review.

How is the inflation scenario?

  • The RBI now expects retail inflation to stay below the legally mandated 4% mark for the coming 12 months.
  • Resultantly, RBI has sharply cut its inflation forecast for the second half of the current fiscal year - from 3.9-4.5% to 2.7-3.2%.
  • For the first half of the next financial year, it has been revised from around 4.8% to 3.8-4.2%.
  • The RBI’s own household survey of inflation has shown a 40 basis point downward movement over the last round.
  • Retail inflation is expected to fall further. E.g. the November data is estimated at 3%
  • The dip in retail inflation is largely a result of the unexpected deflation in food items such as pulses, vegetables and sugar.

What is RBI's rationale?

  • Over the policy reviews, RBI has maintained its single-minded focus on targeting only retail inflation and inflation expectations.
  • But despite a favourable inflation trajectory, the monetary policy committee did not cut the repo rates.
  • An analysis of the components of retail inflation explains this.
  • Evidently, the headline retail inflation, mapped by year-on-year changes in the consumer price index, has decelerated sharply.
  • This is primarily driven by the sharp decline in food and fuel prices.
  • However, the non-food, non-fuel retail inflation has actually risen to over 6%.
  • Moreover, the RBI is worried about
  1. the residual impact of minimum support prices
  2. possible fiscal slippages
  3. a sudden increase in oil prices if the OPEC countries decides on production cuts
  • So the RBI wants to pause and decide only after ensuring the decline in inflation is of a more robust nature.

What is RBI's stance on growth?

  • The Q2FY19 gross domestic product (GDP) data undershot the RBI’s projection.
  • However, the RBI maintains its annual forecast of 7.4% GDP growth in the current financial year.
  • Economic growth has suffered in most of the advanced world.
  • Both the US and the euro area have slowed even as Japan has contracted in the past quarter.
  • Moreover, several emerging economies such as China and Russia, too, have decelerated.
  • Yet, the RBI sounded relatively confident about the domestic economy.
  • It highlighted the increased capacity utilisation in manufacturing sector, improving credit offtake and lower crude oil prices that may boost consumption.
  • Notably, capacity utilisation in manufacturing sector rose to 76.1% in Q2, higher than the long-term average of 74.9%.
  • Also, industrial firms reported an improvement in the demand outlook for Q4.
  • But besides these, RBI has once again raised a cautionary signal to governments, both at the Centre and in the States.
  • Fiscal slippages risk impacting the inflation outlook, heightening market volatility and crowding out private investment.
  • Instead, this may be an opportune time to bolster macroeconomic fundamentals through fiscal prudence.

 

Source: Business Standard, The Hindu

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