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RBI stands pat in December, likely to reduce repo rates by 25 bps in February 2018 - ANZ

The Reserve Bank of India kept its repo rate on hold at 6 percent today, as expected, with a neutral stance. Five members voted in favor of keeping the rate unchanged, while one member voted for a reduction of 25 basis points. The decision to keep rate on hold was mainly due to the recent rise in inflation and crude oil prices.

The monetary policy committee highlighted the usual upside risks to inflation due to the implementation of farm loan waivers by states, strengthening of international crude prices and potential fiscal slippage by central and state governments.

Meanwhile, the central bank is also positive about the outlook of food price, especially of perishables. Also, the RBI took note of the recent lowering of GST rates on several retail goods and services. Both these factors might reduce upside pressure on inflation in months ahead, noted ANZ in a research report.

Excluding the further increase in crude oil prices, most of the risks highlighted by the Monetary Policy Committee might not materialize. Spending at the state and central government levels is likely to be more limited in months ahead to mitigate the risk of fiscal slippage. Along with low capacity utilization, this is expected to be negative from the perspective of aggregate demand in the economy.

Meanwhile, the RBI also retained its FY2018 GVA growth forecast of 6.7 percent. Also, the central bank noted that private consumption decelerated to an eight-quarter low in the second quarter of fiscal 2018. In all, for the central bank’s forecast to realize, the GVA would be required to grow 7.6 percent in the second half of fiscal 2018.

“Overall, we expect the RBI to reduce repo rates by 25bps at the next review scheduled for February”, added ANZ.

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