On Wednesday, the Reserve Bank of India kept its key rates unchanged for the second time in a row.
In its monetary policy review the central bank shifted its stance from ‘accommodative’ to ‘neutral’.
“The committee decided to change the stance from accommodative to neutral while keeping the policy rate on hold to assess how the transitory effects of demonetisation on inflation and the output gap play out,” the resolution of the Monetary Policy Committee said.
Repo rate continues to stand at a six-year low of 6.25 per cent and the reverse repo rate was retained at 5.75 per cent.
“The decision of the Monetary Policy Committee (MPC) is consistent with a neutral stance of monetary policy in consonance with the objective of achieving consumer price index (CPI) inflation at 5 per cent by Q4 of 2016-17 and the medium-term target of 4 per cent within a band of +/- 2 per cent, while supporting growth,” said the statement.
The monetary policy committee said it is “committed to bringing headline inflation closer to 4.0 per cent on a durable basis and in a calibrated manner” and that requires further “significant decline in inflation expectations.
RBI also revised its gross value added growth projection down to 6.9 per cent for FY2016-17 from 7.4 per cent earlier, but added that it will pick up sharply to 7.4 per cent in FY2017-18.
The central bank also decided to form a separate enforcement department for stricter enforcement of its regulatory and supervisory actions.
RBI’s move to keep rates unchanged defied analysts take, who were expecting a slash of 0.25 percentage point.
The factors which were pushing for a rate cut included inflation being under control at 3.3 per cent for December and under 4 per cent mark in January, pushing growth prospects after the demonetisation impact and also a commitment from the government to keep the fiscal deficit at 3.2 per cent for next fiscal.
However, core inflation staying put and not showing signs of decline, a possible increase in oil prices following decisions by the OPEC and further hardening of rates in the US were some of the factors that prevented RBI from lowering the lending rate.
Apart from that, RBI Governor Urjit Patel cut the economic growth forecast to 6.9 per cent for the current fiscal from 7.1 per cent estimated earlier. However, he also said that the economy will bounce back to 7.4 per cent rate next fiscal.
In its last monetary policy on December 7, the central bank had cut growth forecast to 7.1 per cent, from its earlier projection of 7.6 per cent for this fiscal.
The RBI projection of 6.9 per cent GVA growth for current fiscal comes on the back of the Economic Survey last week forecasting economic growth of 6.5 per cent.
(With inputs from PTI)