The RBI.

RBI lowers 2017-18 growth projection to 6.7 from 7.3%; maintains key rates

RBI keeps repo rate unchanged but frees up more liquidity

Agency Report | Mumbai | 4 October, 2017 | 11:00 PM

The Reserve Bank of India (RBI) on Wednesday lowered the country's growth projection for 2017-18, pegging the Gross Value Added (GVA) at 6.7 per cent. The RBI held its policy rate steady near seven-year lows on Wednesday after inflation surged, but still looked to prop up the cooling economy by spurring banks into lending more.

The central bank had earlier estimated India’s GVA to grow in 2017-18 at 7.3 per cent.

Taking into account various factors during the fiscal, the RBI said: “The projection of real GVA growth for 2017-18 has been revised down to 6.7 per cent from the August 2017 projection of 7.3 per cent, with risks evenly balanced.”

GVA is considered a more accurate index of growth as it excludes the component of taxes and subsidies that go into the calculation of the Gross Domestic Product (GDP).

Pulled down by sluggish manufacturing, growth in the Indian economy, during April to June, fell to 5.7 per cent, clocking the lowest GDP growth rate under the Narendra Modi dispensation.

While announcing its fourth bi-monthly monetary policy review of the fiscal, the RBI also kept its key interest rate unchanged at 6 per cent citing upside risks to inflation.

Another factor weighing on the RBI in lowering the growth outlook was the new Goods and Services Tax (GST)

“The implementation of the GST so far also appears to have had an adverse impact, rendering prospects for the manufacturing sector uncertain in the short term. This may further delay the revival of investment activity, which is already hampered by stressed balance sheets of banks and corporates,” the RBI monetary policy statement said.

“Consumer confidence and overall business assessment of the manufacturing and services sectors surveyed by the Reserve Bank weakened in Q2 of 2017-18,” it added.
Rising inflationary pressure and concerns over “fiscal slippage” prompted India’s central bank, the RBI, on Wednesday to maintain its key lending rates.

However, the central bank eased liquidity constraints, and also lowered the country’s growth projection due to the implementation of the Goods & Services Tax and loss of consumer and business confidence.

According to the Reserve Bank of India’s fourth bi-monthly monetary policy review of 2017-18, the repurchase rate, or the short-term lending rate for commercial banks on loans taken from it, has been maintained at 6 per cent.

Consequent to the decision to maintain the repo rate, the reverse repo rate remained at 5.75 per cent.

“The decision of the MPC (Monetary Policy Committee) 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,” the fourth bi-monthly monetary policy statement said.

The decision was taken by the six-member MPC headed by RBI Governor Urjit R. Patel. Five members of the panel voted in favour of maintaining the key lending rate.

The six-member MPC is equally divided amongst government nominees and the RBI.

At its last policy review in August, the central bank had reduced its repo rate by 25 basis points (bps) to 6 per cent from 6.25 per cent.

“The MPC observed that CPI inflation has risen by around two percentage points since its last meeting… Such juxtaposition of risks to inflation needs to be carefully managed. Although the domestic food price outlook remains largely stable, generalised momentum is building in prices of items excluding food, especially emanating from crude oil. The possibility of fiscal slippages may add to this momentum in the future,” the statement said.

“The MPC also acknowledged the likelihood of the output gap widening but requires more data to better ascertain the transient versus sustained headwinds in the recent growth prints. Accordingly, the MPC decided to keep the policy rate unchanged. The MPC also decided to keep the policy stance neutral and monitor incoming data closely. The MPC remains committed to keeping headline inflation close to 4 per cent on a durable basis.”

However, to induce liquidity into the system, the RBI reduced the Statutory Liquidity Ratio (SLR) — a reserve requirement that commercial banks must maintain — by 50 basis points to 19.5 per cent from October 15.

Further, RBI lowered the country’s growth projection for 2017-18, pegging the Gross Value Added (GVA) at 6.7 per cent.

The central bank had earlier estimated India’s GVA in 2017-18 to grow at 7.3 per cent.

Taking into account various factors during the fiscal, the RBI said: “The projection of real GVA growth for 2017-18 has been revised down to 6.7 per cent from the August 2017 projection of 7.3 per cent, with risks evenly balanced.”

The equity markets, which had already discounted any further reduction in key lending rates, made substantial gains as RBI reduced the SLR which created a healthy demand for the banking stocks.

The key indices also rose on the back of positive global cues and value buying.

The wider Nifty50 of the National Stock Exchange (NSE) rose by 55.40 points, or 0.56 per cent, to 9,914.90 points.

The 30-scrip Sensitive Index (Sensex) of the BSE, which opened at 31,522.17 points, closed at 31,671.71 points — up 174.33 points, or 0.55 per cent.

The S&P BSE banking index rose by 0.17 per cent to close at 27,126.98 points.

Kotak Mahindra Bank closed higher by 2.16 per cent, followed by Yes Bank (up 1.55 per cent), State Bank of India (up 0.82 per cent), Punjab National Bank (up 0.39 per cent) and IndusInd Bank (up 0.37 per cent).

On the other hand, ICICI Bank (down 0.88 per cent), HDFC Bank (down 0.66 per cent) and Axis Bank (down 0.63 per cent) were losers on the BSE. (IANS)