RBI monetary policy review: Three reasons why MPC chose to hold repo rate at 6% on Wednesday

The Reserve Bank of India on Wednesday did not change repo, the benchmark lending rate at which banks borrow from the central bank, and kept it at over six-year low of 6 percent. The no change in key interest rate was on the lines of what most of the economists expected. Wednesday’s status quo was third policy stance wherein RBI held rate since August 2017 when it had brought down the key lending rate by 25 basis points to 6 percent from 6.25 percent, which was much on the lines of experts’ opinions. This time the monetary policy committee (MPC), formed on the lines of the Federal Open Market Committee (FOMC) in the US, had a tough time in arriving at the review in repo.[caption id="attachment_4325927" align="alignleft" width="380"]

RBI is banking regulator. AFP.[/caption]These are the three main reasons why the RBI did not change repo rate on 7 February.One, the RBI was closely monitoring what was happening at the domestic as well as global equity markets as they had seen one of the worst ever crashes in the days ahead of the policy review. India’s benchmark Sensex had fallen more than 1,200 points in days after the long term capital gains tax was re-introduced in the Union Budget 2018 on 1 February.The Dow had also crashed some 1,000 points in a few days trading. This is what RBI said in its policy statement, “Financial markets have become volatile in recent days due to uncertainty over the pace of normalisation of the US Fed monetary policy in view of January payrolls data showing rapidly accelerating wage growth and better than expected employment.”Second, the central bank also took into consideration the first advance estimate for gross value added (GVA) growth that the central statistics office (CSO) revised down to 6.1 percent for 2017-18 fiscal year. The GVA for 2017 financial year was 7.1 percent. The RBI blamed the slowdown in agriculture and allied activities, mining and quarrying, manufacturing, and public administration and defence (PADO) services for the lower GVA growth.Third, the RBI monitors very closely the changes in the consumer price index (CPI) based inflation or retail inflation for calculating the new repo rate. Retail inflation is measured by the yearly change in CPI. Inflation went up for the sixth consecutive month in December 2017 on account of a strong unfavourable base 3 effect, the RBI observed. “After rising abruptly in November, food prices reversed partly in December, reflecting mainly the seasonal moderation, albeit muted, in prices of vegetables along with continuing decline in prices of pulses.”Click here for full coverage of Union Budget 2018.