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2018.12.0505:44:00UTC+00India Central Bank Holds Key Rate Steady Amid Inflation Worries

India's central bank on Wednesday left its key interest rate unchanged for a second policy session in a row as it saw upside risks to the inflation outlook and maintained its policy stance of "calibrated tightening".

The central bank also took steps to make banks lend more to boost the economy, by deciding to reduce the statutory liquidity ratio, or SLR, which is a form of reserve requirement that that banks have to maintain in liquid assets such as cash, gold and government securities.

The Monetary Policy Committee decided to keep the repo rate unchanged at 6.5 percent, the Reserve Bank of India said in a statement. The decision was in line with economists' expectations. The reverse repo rate was retained at 6.25 percent.

The bank announced that the SLR will be reduced by 25 basis points every quarter starting from the March quarter of 2019, until it reaches 18 percent of deposits. The ratio is currently at 19.5 percent.

The six-member MPC, led by Governor Urjit Patel, unanimously decided to keep the key rate unchanged, while Ravindra Dholakia voted to change the stance to "neutral".

The policy stance was shifted to "calibrated tightening" from "neutral" in the previous policy session early October.

Taking into account inflationary expectations, the bank had raised the benchmark rate by 25 basis points each in June and August.

Policymakers reiterated the bank's commitment to achieving the medium-term target for headline inflation of 4 percent on a durable basis.

Several uncertainties still cloud the inflation outlook, the RBI said, adding that it will be watchful of any second-round effects on inflation stemming from revisions in the house rent allowance for government employees.

The RBI projected inflation at 2.7-3.2 percent for the second half of the fiscal year 2019 and 3.8-4.2 percent for the first half of fiscal year 2020, "with risks tilted to the upside".

The projected inflation path remains unchanged after adjusting for the house rent allowance revisions impact of central government employees as this impact dissipates completely from December 2018 onwards, the bank said. Further, the bank said the evolution of food inflation will be monitored closely.

The central bank forecast GDP growth for fiscal 2019 at 7.4 percent, as in the October policy. Growth in the second half of the financial year is seen at 7.2-7.3 percent. For the first half of fiscal 2020, growth was projected at 7.5 percent.

Risks are "somewhat to the downside", the RBI noted, while in October, the bank had said the risks were "broadly balanced".

The MPC noted that the benign outlook for headline inflation is driven mainly by the unexpected softening of food inflation and collapse in oil prices in a relatively short period of time, the bank said.

Excluding food items, inflation has remained sticky and elevated, and the output gap remains virtually closed, the bank added.

Even as escalating trade tensions, tightening of global financial conditions and slowing down of global demand pose some downside risks to the domestic economy, the decline in oil prices in recent weeks, if sustained, will provide tailwinds, the RBI said.

The central bank also stressed that the time is apposite to further strengthen domestic macroeconomic fundamentals and that fiscal discipline was critical to create space for and crowd in private investment activity.

"We think that the tightening cycle still has a little further to run," Capital Economics economist Shilan Shah said, citing the upside risks to the inflation flagged by the RBI and the bank's decision to maintain its policy stance of "calibrated tightening".

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