The Reserve Bank of India kept the key interest rates unchanged on Wednesday with the Repo rate at 6.5%, Reverse repo rate at 6.25% and bank rate at 6.75%.
The bank also projected the Gross Domestic Production (GDP) for 2019-20 at 7.4% while Inflation projection of second half of 2018-19 is 2.7-3.2%.
Investors were watching how RBI chief Urjit Patel would respond to the state’s push for more say over the central bank’s role. Economic Secretary Subhash Chandra Garg, a government representative on the RBI’s board, has called for the bank’s governance structure to be changed and panels set up to oversee its functioning.
Having raised the interest rates twice this year, the RBI keep its repurchase rate unchanged at 6.5 percent. This decision is bound to appease the government, which is seeking more support for banks to continue lending.
Here’s a look at what else to watch out for:
Since the last meeting in October, liquidity in the financial system has declined, forcing lenders to raise rates. Some of the reasons include sales tax payments to the government, a seasonal pick-up in loans and intervention by the central bank in the foreign-exchange market to prop up the rupee.
The RBI may seek to assure investors about liquidity conditions by stepping up bond purchases and pumping more cash into the system. The central bank — which has limited its bond purchases to 400 billion rupees ($5.7 billion) a month since October — is expected to increase that to 500 billion rupees a month in the March quarter, according to Indranil Sen Gupta, an India economist at Bank of America Merrill Lynch.
First the good news. Inflation eased to a 13-month low of 3.31 percent in October, well below the 3.9 percent lower end of the RBI’s forecast range for the second half of the financial year to March. The miss may prompt the RBI to lower inflation projections amid a slide in the price of crude oil, the nation’s top import, and a rebound in the rupee from record lows.
Now to the bad news. A subdued inflation reading on account of falling food prices is likely to translate into lower incomes for farmers, which in turn could be a drag on economic growth. Higher guaranteed crop prices announced by the government hasn’t really been of much help so far.
“If public sector construction slows following the national elections in 2019 as the government shifts its focus back to fiscal consolidation, we believe that rural incomes, and with them food inflation, will remain contained for longer,” said Pranjul Bhandari, chief India economist at HSBC Holdings Plc.
Gross domestic product growth in the July-September quarter was disappointing, slowing to 7.1 percent from 8.2 percent in the previous three months to June.
While activity might rebound as some high-frequency data suggest, consumption — the backbone of the economy — is likely to suffer due to tighter liquidity conditions stemming from the shadow banking sector.
Prachi Mishra, chief India economist at Goldman Sachs Group Inc., estimates the cash crunch could lower its growth forecast for the current fiscal year by 12 to 21 basis points.
First Published: Dec 05, 2018 11:30 IST
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