RBI policy expects inflation to rise ; growth forecast lowered

In view of climbing inflation, the Reserve Bank of India (RBI)

In view of climbing inflation, the Reserve Bank of India (RBI) today kept its repo rate (or interest rate) unchanged at six percent. The central bank also lowered growth forecast from 7.3 per cent from August 2017 to 6.7 per cent. The reverse repo, at which RBI borrows from banks will continue to be at 5.75 per cent, it said at the fourth bi-monthly policy review. In its last review in August it had slashed the benchmark lending rate by 0.25 percentage points to 6 per cent, the lowest in 6 years. The RBI said that after a record low in June, inflation is trending up and estimated the headline number to touch 4.6 per cent by the March quarter. It said inflation is expected to rise from its current level and range between 4.2-4.6 per cent in the second half of this year from 3 per cent in Quarter 2 and 4.0-4.5 per cent in the second half of 2017-18. On growth, the RBI cut its 2017-18 forecast by gross value added (GVA) basis to 6.7 per cent from 7.3 per cent earlier. The GDP expansion slowed down for the sixth straight quarter to 5.7 per cent which is a three year low under the new series of computation for the June quarter. However, data released on Tuesday said the core sector growth came at a 5- month high of 4.9 per cent for August, up from 2.9 per cent for July.

The review comes amid a heightened fears of a slowdown in growth due to various factors like the demonetisation exercise and the introduction of the indirect taxation reform GST and a shrill call for fiscal boosters from a varied section of economists. The government has been working on a plan to push up growth, but has not announced any move yet. It cut the excise duty on fuels by Rs 2 in order to minimise the impact of increasing global fuel prices on domestic consumers, a move which heightens the risk of a fiscal slippage.

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