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Surprise: RBI holds repo, cuts FY20 GDP forecast

Some corporate voices backed RBI’s move but with caveats.

ET Bureau|
Last Updated: Dec 06, 2019, 08.01 AM IST|Original: Dec 06, 2019, 08.01 AM IST
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The growth forecast has been cut for the second time in a row after September quarter growth fell to 4.5 per cent, the slowest pace since 2013.
Mumbai: The RBI dashed market expectations by keeping the benchmark interest rate unchanged citing inflationary pressures while slashing GDP growth forecast for FY20 to 5 per cent from the earlier projection of 6.1 per cent.


The central bank, however, kept the doors open for rate cuts depending on the “unfolding situation” amid an uncertain economic climate that’s left policy makers torn between prioritising growth and containing prices.

The GDP growth forecast was lowered owing to slumping demand and increased inflation projections for the current fiscal owing to rising sugar, onion, pulses and milk prices that may remain elevated for the next few months.

The six-member Monetary Policy Committee (MPC) vote was unanimous, the RBI said. It also retained an ‘accommodative’ policy stance although many analysts believe interest rate reductions may be off the table at least until April as inflation expectations are rising, as is the possibility of the government missing revenue targets.

Markets falter, but recover

“There is a need to optimise the impact of rate reductions,” governor Shaktikanta Das told reporters after the decision of the MPC was announced. “The key consideration has to be the timing of further actions, even as we monitor the impact of actions already taken so far. It is in this context the MPC decided to pause for now and evaluate the developments with a readiness to act if unfolding situation so warrants.”

The repo rate, at which RBI lends to banks, was retained at 5.15 per cent.
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The decision of MPC shocked markets, which had expected at least a quarter point reduction. An ET poll of 21 market participants on the weekend had predicted a cut of 25 basis points or more. A basis point is 0.01percentage point.

The Federation of Indian Chambers of Commerce and Industry (Ficci) expressed disappointment at the central bank action, calling for strong policy measures to revive growth.

“A cut in the policy rate was also important for boosting the sentiment in the market and amongst investors, and Ficci was hoping for abolder action on this front. In fact, we feel that a further cut of 75 to 100 basis points in the repo rate is required in a short period of time to strengthen growth in the economy,” said Sandip Somany, president, Ficci. “With the growth projection for the current year being revised down from 6.1 per cent to 5 per cent, both the government and RBI should initiate some stronger measures to break the logjam particularly in stressed sectors of the economy.”

Bond yields rise

Yields on the benchmark government bond rose 15 basis points to 6.61 per cent. The rupee strengthened 24 paise to 71.29 per dollar. Stocks faltered as soon the announcement was made, but recovered. The BSE Sensex closed at 40,779.59 points and the Nifty 50 at 12,018.4, both marginally down.

“The surprise pause reflects multiple factors such as rising inflation and higher inflation expectations, hopes of a possible counter-cyclical fiscal policy response from the government and a decision to wait and monitor policy transmission,” said Sonal Varma, economist at Nomura Securities.

Retail inflation in the second half has been pegged at 5.1-4.7 per cent against 3.5-3.7 per cent estimated in the previous policy.

Das also raised the issue of state revenue falling below expectations and what could be in store from the central government in its efforts to revive the growth rate, given that the budget is due in about two months.

“In line with the slowdown in the economy, GST collections so far have fallen below the budgeted targets and a similar scenario in direct tax and customs duty collections cannot be ruled out,” said Das. “It is also likely that the government may initiate some more counter-cyclical fiscal and other measures to arrest the slowdown. The forthcoming Union Budget will provide greater clarity on all these aspects.”

Second cut in growth forecast

The growth forecast has been cut for the second time in a row after September quarter growth fell to 4.5 per cent, the slowest pace since 2013. The RBI said 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 basis points during February-October 2019, transmission to various money and corporate debt market segments ranged from 137 basis points in the overnight call money market to 218 basis points 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,” RBI said.

Some corporate voices backed RBI’s move but with caveats.

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