RBI leaves key rate unchanged; retains growth forecast at 6.7%

Deterred by inflationary concerns, the Reserve Bank today kept the policy rate unchanged leaving little scope for banks to lower interest rates on housing and auto loans.
It raised the inflation estimate to 4.3-4.7 per cent, from the earlier projection of 4.2-4.6 per cent, for the second half of the current financial year.
However it retained the growth forecast at 6.7 per cent for 2017-18 even through the gross value added (GVA) in the second quarter rose to 6.3 per cent.
The 6-member Monetary Policy Committee (MPC), headed by Reserve Bank of India (RBI) Governor Urjit Patel, in its 5th bi-monthly review in the current fiscal, kept repo rate unchanged at 6 per cent and reverse repo at 5.75 per cent.

It said the reason for the decision was "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".
RBI factored in the Housing Rent Allowance (HRA) effect of up to 35 basis points, with risks evenly balanced, following the implementation of the 7th Pay Commission recommendations for central government employees.

The impact of HRA is expected to peak in December. However, the staggered impact of HRA increases by various state governments may push up housing inflation further in 2018, it said.
Expecting price situation to harden, it said: "The moderation in inflation excluding food and fuel observed in Q1 of 2017-18 has, by and large, reversed. There is a risk that this upward trajectory may continue in the near-term."

The recent rise in international crude oil prices may sustain, especially on account of the OPECs decision to maintain production cuts through next year, it said.
It further said that the implementation of farm loan waivers by select states, partial roll back of excise duty and VAT in the case of petroleum products, and decrease in revenue on account of reduction in Goods and Services Tax rates for several goods and services may result in fiscal slippage with attendant implications for inflation.
Of the six, one member, Ravindra H Dholakia, voted for a policy rate reduction of 25 basis points.

The MPC decided to continue with the neutral stance and watch the incoming data carefully. The next meeting of the MPC is scheduled on February 6 and 7.
The MPC remains committed to keeping headline inflation close to 4 per cent on a durable basis.
Although the RBI status quo on the key rate was on expected lines, the BSE Sensex closed 205.26 points or 0.63 per cent down at 32,597.18.