Mumbai: The Reserve Bank of India (RBI) on Wednesday kept interest rate unchanged as widely expected but raised concerns over fiscal slippages in view of rush for farm loan waivers.
It has however slashed the Statutory Liquidity Ratio (SLR) or the percentage of deposits that banks have to park in government securities, by 0.5 per cent to 20.5 per cent, a move that would result increased lending by banks.
The fifth meeting of Monetary Policy Committee (MPC) maintained the repo rate, at which it lends to the banks, at 6.25 per cent and the reverse repo, at which it borrows, will be 6 per cent.
"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 within a band of +/- 2 per cent, while supporting growth," RBI said in its second bi-monthly policy review for 2017-18.
"The current state of the economy underscores the need to revive private investment, restore banking sector health and remove infrastructural bottlenecks. Monetary policy can play a more effective role only when these factors are in place,” it said.
The central bank, however, raised concerns over the possibility of fiscal slippages due to the farm loan waivers.
"The risk of fiscal slippages, which, by and large, can entail inflationary spillovers, has risen with the announcements of large farm loan waivers," it said.
RBI cut the economic growth projection to 7.3 per cent for the current fiscal from 7.4 per cent earlier.
Inflation projection lowered
RBI expects retail inflation to fall to 2-3.5 per cent in the first half of current fiscal and move up to 4.5 per cent in the second half saying that rush for farm loan waivers may have inflationary spillovers.
The abrupt and significant retreat of inflation in April from the firming trajectory that was developing in February and March has raised several issues that have to be factored into the inflation projections, it said.
In its second Bi-monthly Monetary Policy Statement of 2017-18, the Reserve Bank said the prices of pulses are clearly reeling under the impact of a supply glut caused by record output and imports.
"Policy interventions, including access to open trade, may be envisaged to arrest the slump in prices," it said.
The easing of inflation excluding food and fuel may be transient in view of its underlying stickiness in a situation of rising rural wage growth and strong consumption demand, it said.
"If the configurations evident in April are sustained, then absent policy interventions, headline inflation is projected in the range of 2.0-3.5 per cent in the first half of the year and 3.5-4.5 per cent in the second half," it said.
The earlier projection for the retail inflation in first half of the fiscal was 4.5 per cent and 5 per cent in second half.
It further said risks are evenly balanced, although the spatial and temporal distribution of the monsoon and the government staying the course in effective food management will play a critical role in the evolution of risks.
"The risk of fiscal slippages, which, by and large, can entail inflationary spillovers, has risen with the announcements of large farm loan waivers," said the RBI's resolution released after the fifth meeting of Monetary Policy Committee (MPC) headed by RBI Governor Urjit Patel.
RBI said global political and financial risks materialising into imported inflation and the disbursement of allowances under the 7th central pay commission's award are upside risks.
However, the central bank said the implementation of the Goods and Services Tax (GST) is not expected to have a material impact on overall.