The Reserve Bank of India (RBI) has kept the repo rate unchanged at 6.25% in its monetary policy review on Wednesday, citing inflation concerns after the first quarter of the next financial year, once the base effect vanishes.
The RBI said all the six members of the monetary policy committee voted in favour of the decision.
“Favourable base effects and lagged effects of demand compression may mute headline inflation in Q1 of 2017-18,” the central bank said in a statement.
“Thereafter, it is expected to pick up momentum, especially as growth picks up and the output gap narrows. Moreover, base effects will reverse and turn adverse during Q3 and Q4 of 2017-18,” the RBI said.
Many economists expected further reduction in the repo rate, as retail inflation dropped to 3.41% in December – much lower than the central bank’s March end forecast of 5%.
Now, the RBI has projected inflation in the range of 4.0 to 4.5% in the first half of the financial year and in the range of 4.5 to 5.0% in the second half.
The central bank cited ‘three significant upside risks’ that impart some uncertainty to the baseline inflation path – the hardening profile of international crude prices; volatility in the exchange rate on account of global financial market developments, and the fuller effects of the house rent allowances under the 7th Central Pay Commission (CPC) award.
At the same time, the RBI lauded the Central government for its effort in maintaining fiscal discipline that could have a favourable impact on inflation.“The focus of the Union budget on growth revival without compromising on fiscal prudence should bode well for limiting upside risks to inflation,” it said.