In the third bi-monthly monetary policy statement for 2018-19, RBI said various indicators suggest that economic activity has continued to be strong.
The statement issued after three-day meeting of the Monetary Policy Committee (MPC) noted that the progress of the monsoon so far and a sharper than the usual increase in MSPs of kharif crops are expected to boost rural demand by raising farmers’ income.
“Robust corporate earnings, especially of fast moving consumer goods (FMCG) companies, also reflect buoyant rural demand,” the central bank said, adding that investment activity remains firm even as there has been some tightening of financing conditions in the recent period.
Based on an overall assessment, the Reserve Bank of India said that the Gross Domestic Product (GDP) growth projection for 2018-19 is retained, as in the June statement, at 7.4 per cent.
As per the RBI, the growth would be in the range of 7.5-7.6 per cent in first half of the fiscal and 7.3-7.4 per cent in October-March 2018-19 period “with risks evenly balanced”.
The central has also projected the GDP growth for first quarter of the next financial year at 2019-20 at 7.5 per cent.
The monetary policy statement further said that increased FDI flows in recent months and continued buoyant domestic capital market conditions bode well for investment activity.
The central bank said that activity in the manufacturing sector is expected to remain robust in Q2, though there may be some moderation in pace.
Continuing with the reversal of accomodation begun in June, the RBI on Wednesday again hiked its key lending rate by 25 basis points to bring the repo to 6.50 per cent citing upside risks to inflation.
Addressing the media on the hike in the repo, or the short-term lending rate for commercial banks, Reserve Bank of India (RBI) Governor Urjit Patel said its monetary policy committee (MPC) noted that the rise in retail inflation has continued for the third consecutive month.
“On the basis of an assessment of the current and evolving macroeconomic situation at its meeting, the MPC decided to increase the policy repo rate by 25 basis points to 6.5 per cent,” said the third monetary policy review statement of the current fiscal.
“Consequently, the reverse repo rate under the liquidity adjustment facility (LAF) stands adjusted to 6.25 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 6.75 per cent.”
The RBI, however, maintained its ‘neutral’ stance on policy, as it has done over five previous bi-monthly policy reviews which allows it to move either way on rates.
“The decision of the MPC is consistent with the neutral stance of monetary policy in consonance with the objective of 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 said.
Retail inflation in India touched the 5 per cent mark in June, compared to 4.87 per cent in May and has gone beyond the RBI’s revised inflation projection of 4.8-4.9 per cent for the first half of the current fiscal.
Noting the government’s decision to raise minimum support prices (MSPs) by at least 150 per cent of the cost of production for all kharif crops, RBI said this is much higher than the average increase seen in the past few years.
“(This) will have a direct impact on food inflation and second round effects on headline inflation,” the statement said.
The RBI maintained its inflation projection of 4.8 per cent for the second half of 2018-19 and said it would touch 5.0 per cent in the first quarter of the next fiscal 2019-20.
Uncertainty around domestic inflation needs to be carefully monitored in the coming months,” Patel said.
Official data showed on Tuesday that the country’s fiscal deficit rose further in June and stood at Rs 4.29 lakh crore touching 68.7 per cent of the current year’s target.
Patel also pointed to the “tightening” condition of finacial markets and recent global developments that could adversely impact India.
He said rising trade protectionism poses a grave risk to near-term and long-term global growth prospects by adversely impacting investment, disrupting global supply chains and hampering productivity.
“Geopolitical tensions and elevated oil prices continue to be the other sources of risk to global growth,” he added.