MumbaiThe Reserve Bank today kept interest rate unchanged as widely expected but raised concerns over fiscal slippages in view of rush for farm loan waivers.
It has however slashed the Statutory Liquidity Ratio (SLR) or the percentage of deposits that banks have to park in government securities, by 0.5 per cent to 20.5 per cent, a move that would result increased lending by banks.
The fifth meeting of Monetary Policy Committee (MPC) maintained the repo rate, at which it lends to the banks, at 6.25 per cent and the reverse repo, at which it borrows, will be 6 per cent.
“The decision of the MPC is consistent with a 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 in its second bi-monthly policy review for 2017-18.
“The current state of the economy underscores the need to revive private investment, restore banking sector health and remove infrastructural bottlenecks. Monetary policy can play a more effective role only when these factors are in place, it said.
The central bank, however, raised concerns over the possibility of fiscal slippages due to the farm loan waivers.
“The risk of fiscal slippages, which, by and large, can entail inflationary spillovers, has risen with the announcements of large farm loan waivers,” it said.
RBI cut the economic growth projection to 7.3 per cent for the current fiscal from 7.4 per cent earlier.
RBI lowers growth forecast to 7.3 per cent for FY18
The Reserve Bank today marginally lowered the economic growth forecast for the current fiscal to 7.3 per cent even as it hoped that remonetisation would enable pick-up in consumer spending, especially in the cash-intensive segments.
The Central Statistics Office (CSO) has pegged the growth of real gross value added (GVA) for 2016-17 at 6.6 per cent, 0.1 percentage point lower than the second advance estimates released in February 2017.
“With the CSO’s provisional estimates for 2016-17, the projection of real GVA growth for 2017-18 has accordingly been revised 10 bps downwards from the April 2017 projection to 7.3 per cent, with risks evenly balanced,” the central bank said in its second bi-monthly monetary policy, 2017-18.
It said however that the continuing remonetisation “should enable” a pick-up in discretionary consumer spending, especially in cash-intensive segments of the economy.
Also, the reductions in banks’ lending rates post- demonetisation “should support both consumption and investment demand of households and stress-free corporates”, it said.
RBI further said government spending continues to be robust, cushioning the impact of a slowdown in other constituents. “The implementation of proposals in the Union Budget should crowd in private investment as the business environment improves with structural reforms, including the GST, the Insolvency and Bankruptcy Code, and the abolition of the Foreign Investment Promotion Board,” it said.
The resolution of the Monetary Policy Committee (MPC) also said rising input costs and wage pressures may prove a drag on the profitability of firms, pulling down overall GVA growth.
Further, the twin balance sheet problem — over-leveraged corporate sector and stressed banking sector — may delay the revival in private investment demand, it said. As per the RBI, gold imports surged in volume terms, initially driven by seasonal and festival demand but subsequently by stockpiling in anticipation of the roll out of the goods and services tax (GST).
Hit hard by demonetisation, India lost the tag of the fastest growing economy to China in the March quarter with a GDP growth of 6.1 per cent, pulling down the 2016-17 expansion to a three-year low of 7.1 per cent.
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