RBI keeps key rates same, flags inflation & deficit woes

Mumbai: The Reserve Bank on Wednesday opted for the widely expected status quo in key rates citing inflation concerns and flagged risks from a wider fiscal deficit.

The repo rate, at which the central bank lends short-term money, will continue to stay at 6 percent. The reverse repo, the rate at which it borrows from banks and absorbs excess liquidity, will remain at 5.75 percent.

The resolution of the 6-member Monetary Policy Committee (MPC) said "the inflation outlook is clouded by several uncertainties on the upside", flagging risks from 7th pay panel implementation in states, high oil prices, hike in customs duties and fiscal slippage to 3.5 percent in 2017-18 and a higher target for 2018-19.

"Fiscal slippage as indicated in the Union Budget could impinge on the inflation outlook. Apart from the direct impact on inflation, fiscal slippage has broader macro-financial implications, notably on economy-wide costs of borrowing which have already started to rise. This may feed into inflation," it warned.

Deterioration in public finances risks crowding out of private financing and investment, it said, adding that the nascent recovery needs to be carefully nurtured.

RBI said however that it is too early to assess the impact of the minimum support prices hike in foodgrains and the impact on inflation.

RBI also upped its inflation forecast to 5.1 percent for the ongoing fourth quarter of 2017-18 and expects it to firm up further to 5.1-5.6 percent in first half of the next fiscal, before cooling down to 4.5-4.6 percent in the second half.

On the positive side, MPC said there are mitigating factors like subdued capacity utilisation and moderate growth in rural wage while welcoming the focus of Union Budget 2018 -19 on rural and infrastructure spending. RBI also lowered its growth target to 6.6 percent for the current fiscal ending on March 31, from 6.7 percent earlier, but said that it will accelerate to 7.2 percent in 2018-19.

Five members of the panel, including RBI Governor, voted for a status quo while executive director Michael Patra was the lone member who wanted the key rate to be hiked.