RBI maintains wait and watch approach on rates, inflation forecast nudged upwards
As widely expected, RBI maintained a status quo on policy rates citing its neutral monetary policy stance and objective of achieving the medium-term target for consumer price inflation (or CPI) of 4 per cent within a band of +/- 2%, while supporting growth. Consequently, the repo rate remains unchanged at 6%, the reverse repo rate at 5.75% and Marginal Standing Facility (or MSF) rate & Bank rate at 6.25%. The Monetary Policy Committee (MPC) maintained its growth forecast for the year 6.7% and nudged upwards its inflation forecasts for Q3 and Q4 FY18 to a range of 4.3% to 4.7% from its October forecast range of 4.2% to 4.6%.
Going forward, the MPC believes that the inflation path will be influenced by several factors. First, the moderation in core inflation (inflation excluding food and fuel) observed in Q1 2017-18 has reversed and there is a risk that this upward trajectory may continue in the near-term. Second, the impact of HRA increase by the Centre is expected to peak in December and the staggered impact of HRA increases by state governments may push up housing inflation further in 2018. Third, RBI is concerned that the recent rise in international crude oil prices may sustain, especially on account of the OPEC's decision to maintain production cuts through next year. On the other hand, some seasonal moderation in prices of vegetables expected in near months, lower prices of pulses and the recent reduction in GST rates for several retail goods and services which should translate into lower retail prices would have a downward effect on inflation.
The MPC sounds a bit hawkish when it says that the evolving inflation trajectory needs to be carefully monitored due to rising input costs pointing towards high risk of pass-through to retail prices, implementation of farm loan waivers by select states, partial roll back of excise duty and VAT for petroleum products and decrease in revenue due to lower GST rates resulting in fiscal slippage with related implication for inflation. 
The MPC has maintained its economic growth projections in line with its October forecast of 6.7% for FY 2017-18, despite growth for Q2 being lower than projected. Recent improvement in credit growth which could receive a further boost by re-capitalisation of public sector banks, expectation of an improvement in demand, financial conditions & the overall business situation in the services and infrastructure sectors as indicated by recent RBI surveys have been the main factors driving RBI's growth projections. Further, a significant increase in capital raised from the primary capital market after several years of sluggish activity and its deployment in setting up new projects and improvement in the ease of doing business ranking helping sustain foreign direct investment augurs well for economic growth.   
Impact on economy
RBI continues to stress on the importance of transmission on lower policy rates by banks to existing as well as new borrowers. As the interest rate setting mechanism used by banks continues to evolve, it would benefit retail and corporate borrowers thereby boosting the economy as a whole. RBI's objective of maintaining inflation at levels of around 4 per cent would result in more stable and durable economic growth over the long term. Over the short to medium term, resolution of issues related to bad loans and a revival in capital investment are essential for improving the economic growth trajectory.

Source: Morningstar

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