Monetary policy: RBI keeps rates unchanged at 6%, maintains 'neutral' stance


The reverse repo rate was kept steady at 5.75 percent.

The Monetary Policy Committee (MPC), which voted unanimously to maintain rates in the February meeting, said an interest rate rise would be needed "somewhat earlier" in order to return inflation to its 2% target.

The inflation rate stands at 5% plus is inching towards the 6% extreme limit of the targeted 2% to 6%, which is quite uncomfortable, and unless there are no visible signs of these levels relenting the stance of neutral-hawkish would continue.

In its quarterly inflation report published today, the Bank of England warned that future increases to interest rates will be larger and more frequent in future. The meetings of the MPC are held at least four times a year and after every such meeting, it publishes its decisions.

The MPC forecasted CPI, which is now at 3%, to remain above its target despite predicting a fall back over the coming months. "While we retain status quo from RBI for FY19, a risk to our call may come from higher inflation".

United Kingdom government bond prices fell back, with the yield on the benchmark 10-year gilt rising four basis points to 1.592%. fell as the Pound strengthened.

The RBI on Wednesday announced that it will link the base rate with the Marginal Cost of Funds based lending rates (MCLR) from April 1 this year to ensure that banks pass on the benefit of reduced policy rates to borrowers.

Though RBI has held the rates steady since a 25 basis point cut in August 2017, the prospects of rate hike have increased, as annual inflation accelerated to 5.21 percent in December 2017. Considering that the inflation has inched up (Dec-17 CPI at 5.21%, up from 3.58% in Oct-17 and well-above the target of 4%), crude oil prices are rising in the global market and the Government plans to increase the crop support price, maintaining the lending rates unchanged is justified. However, it has projected growth of 7.2% for the next financial year. We expect to see a long pause in the monetary policy if the oil and global commodity prices soften in the next few months.

In its annual review of the UK's "equilibrium" rate of unemployment - the level of joblessness that the United Kingdom economy can tolerate before inflationary pressures build - the Bank cut its estimate from 4.5 per cent to 4.25 per cent, which is roughly where it is today, implying if the rate were to fall lower rates might need to go up faster.

The comments boosted market expectations of a United Kingdom rate hike as soon as May.

The central bank also trimmed its growth forecast for FY18 to 6.6% from 6.7%.

Traders took comfort from the tone of the Reserve Bank of India's statement after a monetary policy review, and by comments from Governor Urjit Patel who appeared to carefully balance the risks to inflation and growth.