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  • 5 reasons why the RBI kept rates unchanged

    The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) just concluded its two-day bi-monthly meeting. At the end of it, the committee voted 5-to-1 in favour of maintaining the status quo on repo rate. As a result, the repo rate continues to remain at 6% for the third consecutive time. So, let’s look at the reasons why the MPC has avoided tinkering key interest rates.

  • Rise in inflation estimates:

    The MPC has raised the Consumer Price Index (CPI) inflation estimate to 5.1% from the previous 4.3-4.7% for the fourth quarter. The potential rise in inflation has been one of the primary reasons for the repo rate to remain unchanged.

  • Impact of HRA increases:

    The government announced the implementation of higher House Rent Allowances (HRA) for government employees under the 7th Central Pay Commission (CPA). This resulted in higher CPA inflation (excluding food and fuel) during the months of November and December. In addition, the committee is of the belief that this would likely push inflation higher in 2018.

  • Risk of fiscal slippage:

    The government has outlined a fiscal deficit target of 3.3% of GDP for 2018-19 against a revised estimate of 3.5% of GDP for 2017-18. And while the fiscal deficit is according to expectations, many experts are of the opinion that there could be risks of slippage if economic activities do not formalise rapidly in the year.

  • Oil prices:

    International crude oil prices have risen sharply since August 2017. The price is expected to be close to around $70 per barrel for most part of 2018 compared to $ 62 per barrel in December 2017 . This has raised concerns of inflation especially since India imports as much as four-fifths of its energy requirements.

  • Impact of MSP

    The Union Budget 2018-19 has been very favourable to the agriculture sector. The Finance Minister announced a Minimum Support Price (MSP) of 1.5 times of production cost for kharif crops. This is to help farmers earn higher incomes.

    While this is good news for the agriculture sector, this could result in higher retail inflation during the year. However, it is a wait and watch situation at the moment since the exact magnitude of its impact cannot be assessed completely.

    • Read the full press release of the monetary policy report: Read more

    • Impact of the HRA hike on inflation Read more

  • Rs 5.95 lakh crore

    The government revised its fiscal deficit target for 2017-18 to 3.5% of GDP from 3.2%. This is equivalent to Rs 5.95 lakh crore. In addition, the fiscal deficit target of 3.3% is a long way from the original ‘3% target in three years’ promised by the Finance Minister in 2014.