RBI keeps rates unchanged, FY20 growth forecast cut to 5% from 6.1%

This is the first pause after five consecutive rate cuts this year. Prior to this, the Monetary Policy Committee (MPC) lowered the repo rate by 135 basis points between February-October 2019.

The Reserve Bank of India (RBI), on December 5, left the repo rate unchanged in its December policy review while maintaining the accommodative stance as it expected past monetary easing and measures taken by the government to feed into the real economy gradually.

The GDP growth target for 2019-20 is revised downwards from 6.1 percent in the October policy to 5.0 percent. The CPI inflation projection is revised upwards to 5.1-4.7 percent for H2:2019-20 and 4.0-3.8 percent for H1:2020-21.

“Will continue to maintain accommodative stance,” said the Monetary Policy Committee (MPC).

All six members voted in favour of a pause, the central bank said in a statement on December 5.

RBI revised its inflation outlook upwards and said that it will monitor incoming data for clarity on inflation. The central bank also cut its growth outlook from 6.1 percent in the October policy to 5 percent for the current financial year.

“The MPC recognises that there is monetary policy space for future action. However, given the evolving growth-inflation dynamics, the MPC felt it appropriate to take a pause at this juncture,” the central bank said. This is the first pause after five consecutive rate cuts by the MPC since February. The policy rate was lowered by 135 basis points between February-October 2019.

RBI said that the decisions were in line with the Monetary Policy Committee’s (MPC) objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 (+/- 2) percent, while supporting growth.

“The MPC notes that economic activity has weakened further and the output gap remains negative. However, several measures already initiated by the Government and the monetary easing undertaken by the Reserve Bank since February 2019 are gradually expected to further feed into the real economy,” the RBI added.

The central bank also expects stronger monetary transmission under the external benchmarking regime, which was introduced from October 1.

“The weighted average term deposit rate declined by 9 bps in October as against a decline of just 7 bps in eight months during February-September. This augurs well for transmission to lending rates, going forward,” RBI said.

RBI also said that inflation is rising in the near-term, but it is likely to moderate below target by second quarter of next financial year. “It is, therefore, prudent to carefully monitor incoming data to gain clarity on the inflation outlook,” RBI added.

The MPC consists of RBI Governor Shaktikanta Das, Deputy Governor Bibhu Prasad Kanungo and Michael Patra as RBI nominees, and Chetan Ghate, Pami Dua and Ravindra Dholakia as external members.

The committee was widely expected to cut rates in the upcoming policy to support the weakening economic growth.

The GDP growth rate in Q2 FY20 slowed down to 4.5 percent, hitting a six-year low on the back of weak consumer demand and slow manufacturing activity. Economists felt flagging growth would drive the MPC to go in for yet another cut despite the consumer price inflation breaching the sacrosanct 4 percent target for the first time since July 2018.

Inflation, as measured by the consumer price index, quickened to 4.62 percent in October, compared to 3.99 percent in September.In its October policy, the committee projected the CPI inflation at 3.5-3.7 percent for H2 FY20 and 3.6 percent for Q1 FY21.

Source: Moneycontrol

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