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RBI holds rates, sees inflation spike.

The Reserve Bank of India (RBI) on Wednesday kept key interest rates on hold, while hiking its inflation outlook for the year and trimming growth forecasts. Bonds, however, rallied with the yield on the 10-year benchmark falling by 11 basis points (100bps = 1 percentage point) to 7.49% as the policy was far less hawkish than expected.

While RBI's policy stance reduces the likelihood of rate cuts by lenders, Bank of Baroda turned out to be an outlier, reducing its benchmark rate for below one-year tenures by 15-25bps. The bank has maintained its one-year benchmark on which home loans are priced. In its sixth bi-monthly monetary policy statement, the central bank said that it expects inflation in the fourth quarter to be at 5.1% as against its earlier expectation of 4.3-4.7% for the third and fourth quarters of FY18. The central bank also trimmed its growth forecast for FY18 to 6.6% from 6.7%.

According to HDFC Bank chief economist Abheek Barua, the monetary policy was far less hawkish than expected. "Unless things go really awry - particularly in oil markets or the domestic fiscal deficit and push inflation way above the projected trajectory - the RBI could stay on hold," he said.

Five members of the RBI's monetary policy committee (MPC) had voted in favour of holding rates. One member, RBI executive director M D Patra, had voted in favour of a rate hike - the first by a member since the MPC was introduced. While the RBI said that it was committed to keep headline inflation close to 4% on a durable basis, it also said, "The nascent recovery needs to be carefully nurtured and growth put on a sustainably higher path through conducive and stable macro-financial management."

"In terms of actual outcomes, headline inflation averaged 4.6% in Q3, driven primarily by an unusual pick-up in food prices in November. Though prices eased in December, the winter seasonal food price moderation was less than usual," the RBI added.

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Publication:Pakistan & Gulf Economist
Date:Feb 18, 2018
Words:376
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