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RBI keeps its key rates unchanged

09 February 2018

The government has missed its targets at three levels, Patel pointed out: missing the target for financial year 2018, projecting a target that is wider than market estimates for the next fiscal, and postponing the 3% fiscal-deficit deadline by two years. It premises this on a host of factors including revival in investment demand and strengthening exports. It took advantage of a period of extraordinary low inflation to cut rates by 200 bps between early 2015 and August 2017.

At the sixth bi-monthly monetary policy session on Wednesday, the Monetary Policy Committee of the Reserve Bank of India made a decision to hold the repo rate and continue with the neutral stance.

India's central banking institution Reserve Bank of India (RBI) kept its key lending rate unchanged after its monetary policy review Wednesday, officials said. A basis point is one-hundredth of a percentage point.

On a brighter note, the BoE ramped up its United Kingdom economic outlook despite Brexit uncertainty.

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There is "need for vigilance around the evolving inflation scenario in the coming months", the RBI said. "Sixth, the confluence of domestic fiscal developments and normalisation of monetary policy by major advanced economies could further adversely impact financing conditions and undermine the confidence of external investors", it added.

If you look at our 2018-19 forecast, and if you make adjustments for HRA, going forward the inflation rates are still around 4.5 per cent. Nominal investment was around 3-4 percent lower in the year to June 2017 than it would have been without Brexit-related uncertainty and the expectation that sales will be lower outside the European Union, according to Bank of England estimates based on a monthly survey of senior executives. Inflation is still expected to fall back gradually, however the MPC notes some firmness in wage growth and expects that pay growth will rise further in response to a tighter labour market'.

"In addition, the central bank has acknowledged that growth is in the nascent stage of recovery and it has to be nurtured".

Credit rating agency, ICRA's principal economist Aditi Nayar also feels the MPC would prefer to wait for additional data and is unlikely to tighten rates in the immediate term.

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The Bank's productivity growth forecast remained pesimistic, expecting growth to pick up to just 1.25 per cent this year and next.

A large section of the economists were of the view that the RBI would not tinker with the repo rate at this stage.

Bond markets were relieved.

Next year's fiscal deficit target of 3.3% is also under a cloud as revenue projections are seen as optimistic. "This is expected to rise to 7.2 percent in FY-2019", the RBI Governor said.

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On the issue of extra dividend from RBI to government (to meet its frail finances), the central bank was clear that dividend payout is a mechanical process and based on that it has already paid what was due to the government this year.

RBI keeps its key rates unchanged