Fear of higher inflation forced RBI to maintain policy rate

Mumbai, Dec 20 (IANS) Inflationary risks forced the Reserve Bank of India (RBI) to hold its key lending rate unchanged at 6 per cent in its fifth bi-monthly monetary policy review, the minutes of its monetary policy committee (MPC) meet held this month showed on Wednesday.

According to the minutes, MPC took note of the headline inflationary trends which have evolved broadly in line with its projections. Inflation is expected to range 4.3-4.7 per cent in Q3 and Q4 of 2017-18, including the impact of increase in house rent allowance (HRA).

"The inflation scenario has evolved by and large along anticipated lines even as there was some unexpected firming up of food prices in October. Inflation is now projected to be marginally higher, going forward, as the recent increase in oil prices is likely to sustain," RBI Governor Urjit Patel was quoted as saying in the minutes.

"Food inflation, led by vegetables, remains highly variable, while deflation in pulses continues. The impact of higher HRA of central government employees on housing inflation will peak in December."

Earlier this month, the RBI in its penultimate monetary policy review of the fiscal had maintained status quo on key lending rates while citing concerns over rising inflation. It also retained economic growth projection for the 2017-18 fiscal.

The central bank said its repurchase rate, or the short-term lending rate for commercial banks, had been maintained at 6 per cent. Consequently, the reverse repo rate remained at 5.75 per cent.

The RBI also raised the inflation forecast for the remainder of the current fiscal to 4.3-4.7 per cent. It said "two of the key factors determining the cost of living conditions and inflation expectations -- food and fuel inflation -- edged up in November.

"Accordingly, the MPC (Monetary Policy Committee) decided to keep the policy repo rate on hold," the fifth bi-monthly monetary policy statement released on December 6 said.

"The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent... while supporting growth," it added.