The Reserve Bank today kept the key interest rate unchanged but cut its inflation forecast on lower food prices, sparking a rally in the stocks and bond markets.
While keeping the benchmark repurchase or repo rate unchanged at 6 per cent and reverse repo at 5.75 per cent for the fourth time straight, the six member Monetary Policy Committee headed by RBI Governor Urjit Patel retained the 'neutral' stance.
The MPC trimmed its April-September inflation projection to 4.7-5.1 per cent, from its February forecast of 5.1-5.6 per cent. It raised economic growth target to 7.4 per cent for 2018-19 fiscal from 6.6 per cent of last fiscal "with risks evenly balanced".
Five of the six members of MPC voted for the decision, while one sought a hike.
"Overall food inflation should remain under check on the assumption of a normal monsoon and effective supply management by the government," Reserve Bank of India said in a statement.
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Cutting inflation forecast for second-half was cut to 4.4 per cent from 4.5-4.6 per cent, RBI reiterated commitment to keep inflation at 4 per cent in medium-term. It however warned that rising trade protectionism and financial market volatility could derail global recovery.
Bonds yields fell after the policy statement, while the rupee gained 18 paise to 64.97 against the US dollar and the benchmark Sensex shot up 577 points.
The status quo policy, the fourth in a row since August last year, will be neutral to the EMIs for housing and vehicle loan borrowers, but banks are free to tinker with both deposit and lending rate depending on their asset liability position.
This was the first bi-monthly monetary policy review of the 2018-19 fiscal which commenced on April 1. The next review will be announced on June 6.
The decision of MPC comes against the backdrop of government's assertion that both the fiscal deficit as well as the revenue shortfall in 2017-18 will be lower than the upwardly revised estimates given in the Union Budget.
The government has also announced that its market borrowing would be only Rs 2.88 lakh crore in the April-September period of 2018-19 as against Rs 3.72 lakh crore it had borrowed in the corresponding period of the last fiscal, 2017-18, ended on March 31.
Patel noted that inflation print for February was lower than the expected but the is MPC always looks ahead.
"MPC believes there are several uncertainties surrounding the baseline inflation path. First, the revised formula for MSP (minimum support price) as announced in the Union Budget 2018-19 for kharif crops may have an impact on inflation, although the exact magnitude will be known only in the coming months," he said.
Second, the staggered impact of house rent allowance revisions by various state governments may push headline inflation up, he said.
Thirdly, he added, in case there is any further fiscal slippage from the Union Budget estimates for 2018-19 or the medium-term path, it could adversely impact the outlook on inflation.
There are also risks to inflation from fiscal slippages at the level of states on account of higher committed revenue expenditure, he said.
Besides, recent volatility in crude prices has imparted considerable uncertainty to the near-term outlook on inflation.
Crude oil prices are hovering around USD 70 per barrel putting pressure on the government to cut duty on this.
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