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Monetary policy: RBI lowers inflation target for first half of FY19

07 April, 2018, 01:09 | Author: Shawna Walton
  • India keeps rates unchanged as inflation forecast cut

"Industrial activity has rebounded and become broad based while services sector has showed resilience and expanded throughout the year", said Urjit Patel, governor, RBI, which has projected a GDP growth of 7.4 per cent in FY19.

The repo rate, at which the central bank lends short-term money to other banks, will continue to stay at 6 percent. Dr. Michael Debabrata Patra voted for an increase in the policy rate of 25 basis points. "When the RBI started its two-day meet on 04 April, there was little hope of a rate cut, given the trend in global crude oil prices", he pointed out.

The Reserve Bank of India kept its policy rates on hold on Thursday and retained its "neutral" stance but lowered its inflation call, reducing the odds of a near-term rate rise and spurring a rally in stocks and bonds.

"Ongoing normalisation of interest rates in the United States, higher global crude oil prices, and the looming threat of escalation in global trade war warranted a cautious approach". The other positive is the outlook on growth with the RBI too appearing to share the assessment of the International Monetary Fund, the World Bank and other economic forecasters that growth is on the upswing - the GDP is projected to grow at 7.4 per cent in FY19. The intent of the policy seems neutral and sends signals for supporting growth in near-term.

The RBI repeated its earlier set of upside risks to inflation.

"If this is a permanent shift in the paradigm of inflation management from a singular focus on bringing long-term inflation down to 4% to an approach that is more supportive of growth, then the RBI might go for a long pause".

"The MPC made a decision to keep the policy repo rate on hold and continue with the neutral stance".

Internationally, while regulatory responses to such tokens are not uniform, it is universally felt that they can seriously undermine the anti-money laundering/FATF (Financial Action Task Force) framework, and adversely impact market integrity and capital control. Transfer of digital asset from an Indian exchange to an worldwide one is as easy as clicking a button, Thakral said.

However on the flip side, the MPC seemed increasingly confident on growth prospects and suggested that "the output gap is closing", although it mentioned downside risks on global trade protectionism, financial market volatility and weak domestic public finances. The inflation index has remained stable at 4.4% and below RBI's last outlook which is one of the key factors to keep lending rates unchanged.

Whether the central bank and the government agencies are really thinking about the betterment of the Indian financial condition or they are planning something with their vested interests, only time will tell that.


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