RBI Leaves Key Rates Unchanged In Monetary Policy

The Reserve Bank of India left the key repo rate unchanged at 6 per cent in its first Bi-monthly Monetary Policy, 2018-19. The central bank said it is continuing with its neutral stance of monetary policy along 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.

While overall food inflation is likely to be under check on the assumption of a normal monsoon and effective supply management by the government, international crude oil prices have become volatile in the recent period and there was some hardening in the second half of March.  This has adversely impacted the outlook for crude oil prices, the RBI said.

Domestic demand in India is expected to strengthen during the course of the year. The increase in HRA (house rent allowance) for central government employees under the Seventh Pay Commission will have an impact till mid-2018. Taking these factors into consideration, projected CPI inflation is projected at 4.4-4.7 per cent in the first half of this fiscal and 4.4 per cent in the second half.

Regarding the growth outlook, the RBI said that there are clearer signs of revival in investment activity as is evident from the expansion in capital goods production and rising imports. Global demand too has been improving, which should encourage exports and boost fresh investment. On the whole, GDP growth is projected to strengthen from 6.6 per cent in 2017-18 to 7.4 per cent in 2018-19 – with risks evenly balanced.

While there won’t be any impact on basic lending or deposit rates, government securities’ rates will definitely get moderated, said Madan Sabnavis, Chief Economist at, CARE Ratings. “Bond yields will come down. But whether lending rates will come down will depend on deposit rates. And banks will not lower deposit rates at this point, because in FY 17-18 banks had a problem in getting deposits. Growth in deposits has been very slow and household savings had shifted to mutual funds. Therefore, there is reason to believe that banks will not really lower deposit rates. But probably the marginal increases in deposit rates which banks were doing, would be avoided following the RBI’s move,’’ he explained.

Market expectations of any rate hikes will be dialed back post this policy and hence bond yields will remain supported on the back of already announced reduction in bond supply in H1 Fy 19, said Pankaj Pathak - Fund Manager, Fixed Income, Quantum AMC.

About the impact of the RBI stance for retail investors, Ranjeet Mudholkar, Vice Chairman and CEO, FPSB India said: “The said status-quo was indeed expected based on the premise that there have been no significant changes in terms of inflationary pressures on the economy. From a personal finance perspective, this implies no change in the interest pay-outs in the fixed income and debt instruments as well as in retail loan rates.”