RBI announces unexpectedly dovish monetary policy: Abheek Barua

New Delhi: As was widely expected, the Reserve Bank of India (RBI) on Thursday maintained status quo in key rates citing uncertainties over inflation, which may be fuelled by rising crude oil prices, fiscal slippages and higher prices of foodgrain.

"This was an unexpectedly dovish policy with the RBI highlighting inflation risks (oil, procurement prices, HRA for government employees) but at the same time revising their forecasts downward,” Abheek Barua, Chief Economist, HDFC Bank said.

The Monetary Policy Committee (MPC) headed by RBI Governor Urjit Patel said that growth rate will accelerate to 7.4 percent in 2018-19, up from 6.6 percent last fiscal, ended March 31, mainly on account of revival of investment activity.

The MPC has maintained status quo for the fourth consecutive time since August last year.

“If this is a permanent shift in the paradigm of inflation management from a singular focus on bringing long-term inflation down to 4 percent to an approach that is more supportive of growth, then the RBI might go for a long pause,” Barua added.

“Bond yields that have rallied are likely to move down a little more. However, whether this is a transient bout of ‘dovishness’ or whether it will endure (especially if one of risks were to surface) remains the key question," he said.

With regard to prices, the MPC lowered retail inflation target for the first half of current fiscal to 4.7-5.1 percent on sharp moderation in food price rise.

The decision of MPC is consistent with the neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 percent within a band of +/- 2 percent, while supporting growth.

Following the decision, the repo rate, at which the central bank lends short-term money to other banks, will continue to stay at 6 percent. The reverse repo, rate at which it borrows from banks and absorbs excess liquidity, will remain at 5.75 percent.

This is the first bi-monthly monetary policy for 2018-19 and the next would be announced on June 6.

With PTI Inputs