RBI cuts GDP growth forecast for current fiscal to 5%, repo rate remains unchanged at 5.15%
The monetary policy committee (MPC) of RBI has maintained an “accomodative” stance, eradicating any chances of a rate hike in future.Updated: Dec 05, 2019 16:57 IST
The Reserve Bank of India on Thursday decided to keep the repo rate unchanged at 5.15% amid the “current and evolving macroeconomic situation” The central bank did cut the gross domestic product (GDP) growth forecast for the current fiscal to 5% from 6.1%.
The monetary policy committee (MPC) of RBI has maintained an “accomodative” stance, eradicating any chances of a rate hike in future.
All members of the MPC voted in favour of the decision. Including this meeting’s stance, the RBI has cut 135 basis points since the start of this financial year.
“We cannot mechanically reduce the rate and [must] allow some time for the previous rate cuts to play out. Currently 44 basis points have been transmitted. We have also introduced external benchmark lending rate since November 1 for the same purpose,” said Shaktikanta Das, governor, Reserve Bank of India on the repo rate decision in a press conference.
Watch | RBI keeps policy rates unchanged, growth forecast slashed to 5%
“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. Accordingly, the MPC decided to keep the policy repo rate unchanged and continue with the accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target,” said a RBI press release.
Abheek Barua, chief economist of HDFC Bank, said RBI’s move on lending rates came as a surprise given the dismal growth for the second quarter of 2019-20.
“It seems that the RBI wishes to see the lagged impact of its front-loaded 135 basis point cut in the policy rate along with some of the slew of fiscal measures plays out for future growth,” he said.
MPC outlook on inflation and growth
The RBI has revised upwards its CPI inflation projection to 5.1- 4.7 % for the second half of the current financial year and to 4% -3.8% for the first half of 2020-21
“Domestic demand has slowed down, which is being reflected in the softening of inflation excluding food and fuel.,” the RBI added.
The real GDP growth projected in the October policy was at 6.1 % for 2019-20. “ GDP growth for Q2:2019-20 turned out to be significantly lower than projected. Various high frequency indicators suggest that domestic and external demand conditions have remained weak,” the RBI added in the release.
Taking into consideration these factors, RBI revised its GDP growth for 2019-20 downwards to 4.9-5.5% from 6.1% in its October policy for the second half of 2019-20.
The central bank’s decision is followed by a weak growth environment. India expanded merely by 4.5% in the July to October quarter, marking the slowest pace of economic growth since March 2013.
“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.
Inflation breached the RBI target of 4% and reached 4.62% in October, according to the data released by the government as compared to 3.99% in September.
“Although RBI is concerned about near-term inflation risks, higher Rabi crop output will assuage the spike in food prices. Benign core-inflation will also persuade RBI to remain accommodative,” said Amar Ambani, president and head Of research at Yes Securities.
According to the October report from the government, the food and beverages inflation had risen by 6.93% as compared to 4.7% in September this year with vegetable inflation alone at 26.1% last month.
“Unexpectedly RBI held interest rates unchanged at 5.15% and maintained the policy stance to accommodative. This means we cannot completely rule out rate cut expectations going ahead. It has downgraded the FY20 growth targets while the market was expecting a cut of 25bps. This had a negative impact on rupee and USD/INR rallied after the policy decision. We expect the currency to rally towards Rs 71.85/dollar and then to Rs 72/dollar amid global trade unrest,” said Rahul Gupta, head of research-currency at Emkay Global Financial Services.
“The expected rate cut of 25 bps would have caused home loan values to fall below 8% for first time ever. However, it is also true that another rate cut alone would have been insufficient to stir housing sales significantly across budget categories. In the present scenario, only the combined effect of lower interest rates coupled with other measures such as a cut in personal taxes – reportedly being considered by the FM – can actually stimulate residential sales out of their current lethargy,” said Anuj Puri, chairman, ANAROCK Property Consultants.