Today Reserve Bank of India in its sixth bi-monthly monetary policy review of 2017-2018, has maintained status quo on the policy rates as it kept all its rates unchanged. The Repo rate is maintained at 6 percent and the reverse repo rate is maintained at 5.75 percent. All other ratios also remained intact in the RBI Monetary Policy.
The RBI has maintained neutral stance, by not changing the ratios, which the market speculators were expecting due to the upward revision of fiscal deficit, surging oil prices etc.
Lowered Economic Growth Projection
RBI has lowered the economic growth projection to 6.6 per cent for 2017-18 from 6.7 per cent. The growth is being influenced by several factors.
First, GST implementation is stabilizing, which is positive for economic activity. Secondly, there are early signs of revival in investment activity due to the improvement in credit offtake, improving capital goods production, imports and large resource mobilization from the primary capital market.
Thirdly, the process of re-capitalization of public sector banks is underway. The large distressed borrowers are referenced for resolution under the Insolvency and Bankruptcy Code (IBC), which is expected to improve the credit flows further and will create demand for fresh investment. Fourthly, while export growth is anticipated to improve further due to the improving global demand, but increased commodity prices, especially of oil, may lead to the fall in aggregate demand.
Higher Inflation Projection
RBI has projected inflation for the fourth quarter to be 5.1 per cent, which is significantly higher than the 4.3- 4.7 per cent range that it had forecasted at its earlier meeting in December 2017. Further, the actual retail inflation had touched a seventeenth month high of 5.2 per cent in December, which was also significantly higher than the RBI target of 4 per cent.
RBI expects the second half inflation to moderate compared to the first half. This is due to the strong favourable base effects, that included the unwinding of the 7th CPC’s HRA impact and softer food inflation projection, assuming a normal monsoon and effective supply management by the Government.
RBI Monetary Policy Impact on Indian Stock Market
Both Inflation and growth are dependent on the oil price which has moved up significantly. As a result, the stock market took it negatively and Sensex fell about 113 points. Initially the market was over 470 points in the morning today. The market was already expecting RBI Monetary Policy to maintain status quo.
A Wall Street Journal survey of 15 investment banks showed that the banks are revising up their projections for oil prices for the year. The average forecast for Brent prices in 2018 rose to $61 per barrel, as per a January survey, which is up $3 per barrel from a month earlier.
US market also witnessed the significant sell down due to fear of rising inflation, and the lower growth and higher inflation will subdue the stock market performance in near future.