The Reserve Bank of India on Wednesday kept the key interest repo rate unchanged and lowered the country's economic growth forecast for 2017-18, and raised inflation projections leaving a little room for further rate cuts.
The worries come after RBI officials took advantage of an extraordinary period of low inflation to cut rates by 200 bps from January 2015 to August 2017, when it became the first Asian central bank to cut rates this year. It follows then that the central bank's rate-setting panel opted to leave benchmark interest rates unchanged and retain a neutral stance to achieve the medium-term target of keeping Consumer Price Index inflation close to 4% on a durable basis, while supporting growth.
Professional forecasters expect inflation to rise to 4.5 per cent by the March quarter, it said.
The RBI, in its Wednesday policy meeting, sharply revised downward its growth forecast for the Indian economy to 6.7 percent for FY18, from a previous forecast of 7.3 percent. "Such juxtaposition of risks to inflation needs to be carefully managed", the fourth bi-monthly monetary policy statement said. RBI announced that the repo rate at 5.75 per cent will remain unaltered.
Although, the central bank decided to make no changes in real interest rate, it introduced a list of framework for trading platforms at different levels.
"In its last policy review in August, the RBI had reduced the repo rate, citing reduction in inflation risks". "I strongly recommend that there should be a 100 basis points rate cut". "By maintaining status quo with a 5:1 verdict the MPC has clearly reiterated its wait and watch approach". In mid-September, petrol rates here, for instance, Atouched their highest level since Modi assumed office three years ago. RBI also cautioned the government against any fiscal stimulus package arguing that the combined fiscal deficit of both the Centre and the states are already in the region of six per cent of the GDP and such fiscal action could undercut India's macro-economic stability. The CAD widened to a four-year high of $14.3 billion, or 2.4 per cent of GDP (annualised), in June quarter of 2017.
With consumer inflation at 12.3 per cent in August (significantly higher than the policy target of eight per cent), the Monetary Policy Committee of the Bank of Ghana has also kept its policy rate of 21 per cent unchanged after its September 2017 meeting citing among other reasons further strengthening of the United States dollar following the monetary policy normalisation in the USA.
Yet, whether its decision to lower the SLR will do much to spur economic growth is uncertain. "Even as food inflation subsides in 4Q17, non-food factors, including lagged impact of GST changes, housing rent allowance increases and high fuel prices, along with unfavourable base effects will underpin readings", said Radhika Rao, economist at Singapore-based DBS bank in a note.
It is thus expected to react with concern after a surge in food prices boosted retail prices up 3.36 percent in August from a year earlier.
On the domestic front, real gross value added (GVA) growth slowed significantly in Q1 of 2017-18, cushioned partly by extensive frontloading of expenditure by the central government.