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RBI keeps rates unchanged due to inflation pressure, lowers growth estimate again

The six-member monetary policy committee (MPC) vote was unanimous, RBI said in a release.

, ET Bureau|
Updated: Dec 05, 2019, 02.43 PM IST
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Mumbai/Kolkata: The Reserve Bank of India (RBI) kept the benchmark interest rate unchanged due to inflation pressure, dashing expectations of another reduction, and lowered its growth forecast. The central bank, which also raised its inflation forecast, said however that there’s room to cut rates if the pressure on prices eases.

The six-member monetary policy committee (MPC) vote was unanimous, RBI said in a release, adding that it decided to persist with the accommodative policy stance. An ET poll of 21 market participants on the weekend had predicted a cut of 25 basis points or more. A basis point is 0.01 percentage point.

The GDP growth forecast for the current fiscal has been cut to 5% from earlier projection of 6.1%. The retail inflation estimate for the second half has been raised to 5.1-4.7% from 3.5-3.7% projected in the previous policy. The Sensex fell more than 200 points immediately after the policy announcement before recovering.

The growth forecast has been cut for the second time in a row after September quarter growth fell to 4.5%, the slowest pace since 2013. The inflation forecast was also raised for the second time in a row as costlier vegetables pushed up the Consumer Price Index.

The central bank acknowledged the dual challenges of rising prices and slowing growth, but said that inflationary pressure could be transitory as it involved a few food items due to adverse farm economy developments.

“The MPC recognises that there is monetary policy space for future action,” the RBI said. “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.”

The repo rate, at which the RBI lends to banks, has been retained at 5.15%.

Poor credit offtake drew the attention of MPC members with loan growth and various indicators showing that it has become anaemic.

But the RBI said that that monetary transmission has been full and reasonably swift across various money market segments and the private corporate bond market. Against the cumulative reduction in the policy repo rate by 135 bps during February-October 2019, transmission to various money and corporate debt market segments ranged from 137 bps in the overnight call money market to 218 bps in the commercial paper market.

“While improved monetary transmission and a quick resolution of global trade tensions are possible upsides to growth projections, a delay in revival of domestic demand, a further slowdown in global economic activity and geo-political tensions are downside risks,” the RBI said.

While the MPC acknowledged the inflation pressure, investors are turning their attention to the fiscal deficit numbers, which are likely to push up market borrowings although finance minister Nirmala Sitharaman has said that she would let the “market speculate” on the likely final figure.

“The economic activity has weakened further and the output gap remains negative,” the RBI said. “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 International Monetary Fund had cut its estimate for India’s growth this year to 6.1% from 7% projected earlier. The inflation forecast has been raised due to increase in food prices, geopolitical uncertainties and price expectations of participants in the central bank’s survey.

The RBI decision will hurt the local currency, said Rahul Gupta, head of research, currency, Emkay Global Financial Services.

“This has a negative impact on rupee, and dollar rallied against rupee after the policy decision,” he said. “We expect prices to rally towards 71.85 and then 72 amid global trade unrest.”

The next meeting of the MPC is scheduled for February 4-6, 2020.
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