RBI bi-monthly monetary policy: Urjit Patel hints at future rate hike, citing risks to inflation

"If the upside risks we have flagged do not materialise or are muted in their impact on the incoming data, there is a possibility of space opening up for commensurate policy actions by the MPC," Patel said to reporters.

He said the cash reserve ratio (CRR) is not within the monetary policy committee's (MPC) ambit and added that, RBI needed more data to ascertain the durability of decline in inflation.

The CRR refers to a certain percentage of total deposits the commercial banks are required to maintain in the form of cash reserve with the central bank.

The governor said other than CRR, the central bank has many other instruments at its disposal and RBI has implemented these tools over the last two months for liquidity management.

"The MPC observed that retail consumer price index (CPI) inflation dipped to an intrayear low of 3.3 percent in October pulled down by food prices, plunging into deflation. Whereas inflation relating to fuels remained elevated and excluding food and fuel, CPI inflation accelerated to 6.1 percent. While near-term household inflation expectations softened, they remained unchanged for the 12-month ahead horizon," Patel said.

Talking on trade, the governor said, "In our assessment of external sector developments, the MPC noted that India’s merchandise exports rebounded in October but imports also grew at a faster pace and consequently the trade deficit widened."

He said, "On the financing side, net foreign direct investment (FDI) flows moderated in relation to a year ago while during the year up to November, there were net portfolio outflows. On the other hand, non-resident deposits increased markedly. Reflecting these developments India’s foreign exchange reserves were at about $394 billion as on November 30."

On growth projections, governor said, "The MPC observed that going forward, low rabi sowing may adversely affect agriculture and hence rural demand. Financial market volatility, slowing global demand and rising trade tensions pose some downside risks to exports. On the other hand, the decline in crude oil prices is expected to boost corporate earnings and raise private consumption through higher disposable incomes. As mentioned, bank credit growth has strengthened and they should support the productive sectors of the economy."

"Gross domestic product (GDP) growth for 2018-2019 has been retained at 7.4 percent, which means 7.2-7.3 percent in the second half and for the first half of 2019-2020 at 7.5 percent with the risks somewhat to the downside," the governor added.

About Indo-Japan currency swap, Patel said, "India and Japan have agreed to enter into a bi-lateral swap arrangement of $75 billion, which will provide a partial backstop to foreign exchange reserves and hence the capability of the RBI to stabalise foreign exchange and market in situations of heightened market volatility and sudden stops and/or reversals of capital flows."

In regard to growth projections, he said, "The MPC observed that going forward, low rabi sowing may adversely affect agriculture and hence rural demand. Financial market volatility, slowing global demand and rising trade tensions pose some downside risks to exports."

"On the other hand, the decline in crude oil prices is expected to boost corporate earnings and raise private consumption through higher disposable incomes. As mentioned, bank credit growth has strengthened and they should support the productive sectors of the economy. GDP growth for 2018-2019 has been retained at 7.4 percent, which means 7.2-7.3 percent in the second half and for the first half of 2019-2020 at 7.5 percent with the risks somewhat to the downside."

On inflation outlook, the governor said, "The MPC was of the view that the broad based weakening of food prices and sharp decline in international crude oil prices imparts a downward bias to headline inflation trajectory going forward. In contrast, there has been a broad based increase in inflation in non-food groups."

"According, taking all this together inflation is projected at 2.7 to 3.2 percent in second half of 2018-19 and 3.8 to 4.2 percent in first half of 2019-2020 with risks tilted to the upside. Although, recent inflation prints have surprised to the downside and prices of petroleum products have softened considerably. It is important to monitor the evolution closely and allow heightened short-term uncertainties to be resolved by incoming data."

"The monetary policy completely evaluated current and evolving macroeconomic conditions and voted today to maintain status quo while reiterating its commitment to achieving the medium-term target for headline inflation at 4 percent on a durable basis. We noted that the global economy is likely slowing, the outlook is weighed down by decelerating global trade, ongoing trade tensions and expectations of slowing demand. Crude oil prices have declined by close to 30 percent since they peaked in early October at about the time of the last policy reflecting higher supplies and easing of geo-political tensions. In many key emerging market economies, inflation has risen but the recent retreat in energy prices and stabilising of currencies may have a salutary impact going forward," Patel said.

Talking on overall economic picture, the governor said, "Global financial markets have been volatile. With the easing of the US dollar, emerging market  currencies in recent weeks have been trading with an appreciating bias. Domestically GDP growth slowed in Q2 due to moderation in private consumption however, the monetary policy committee (MPC) noted that gross fixed capital formation expanded by double digits for the third consecutive quarter and the growth of imports accelerated relative to imports attesting to the underlying strength of domestic demand."