RBI maintains a neutral stance

The decision of the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) to hike the repo rate by 25 bps to 6.50%, thereby moving the reverse repo rate to 6.25%, and maintaining the Cash Reserve Ratio at 4%, indicates the neutral stance adopted by the RBI on the monetary policy.

The CPI inflation has been lower than RBI’s projection due to the lower seasonal uptick in the prices of fruits and vegetables during last summer. The RBI has therefore marginally lowered its inflation projection for the second quarter of FY19 to 4.6%.

On the growth front, the Indian economy is going strong on account of buoyancy in rural demand and growing investment activity. Due to this, the RBI has maintained its projection for GDP growth for FY19 at 7.4%, with a growth of 7.5-7.6% expected in HY1FY19 and 7.3-7.4% in H2FY19.

However, RBI has flagged some of the risks to its outlook on inflation, including volatility in crude prices and global financial markets, the impact of hike in MSPs of crops, rising input costs for the manufacturing sector, fiscal slippages of the Centre and state governments, revision of HRA by state governments, etc. Taking these risks into consideration, the MPC decided to hike the repo rate by 25 bps.