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Published on 5/12/2019 6:22:46 PM | Source: Reuters

RBI stuns with rate cut pause, projects growth at more than decade low

Posted in Economy News| #RBI #Economy #Banking Sector

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By Swati Bhat and Euan Rocha

MUMBAI - The Reserve Bank of India (RBI) kept its key lending rate on hold in a shock decision on Thursday while sharply revising its forecast for the economy to project the weakest growth in over a decade.

The RBI's monetary policy committee (MPC) had been widely expected to deliver its sixth interest rate cut of the year on Thursday. Instead, the six-member panel unanimously voted to hold the key repo rate at 5.15% while the reverse repo rate was also held at 4.90%.

Explaining its decision, the MPC said it was concerned about inflation in the near-term, while acknowledging that there is room to cut rates further.

"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 committee said in a statement.

The RBI lowered its GDP growth forecast for the year ending March 2020 to 5% from 6.1%, while raising its headline inflation projection for the second half of the ongoing financial year to between 5.1%-4.9%, from an earlier forecast of 3.5%-3.7%.

India's economic growth fell to 4.5% in the September period down from 7% a year ago, to post its weakest levels in more than six years, and the economy is growing well below the pace needed to generate enough jobs for the millions of Indians entering the labour market each month. If the RBI's growth forecast for the 2019/20 fiscal year proves correct, it would be the weakest performance since 2008/09.

The RBI reiterated that it would maintain an accommodative stance "as long as it is necessary to revive economic growth, while ensuring that inflation remains within the target."

Gross domestic product numbers released on Friday had shown government spending helping to prop up weak demand, while private investment growth had virtually collapsed, with a crisis in the shadow banking sector causing illiquidity in the economy.

Annual retail inflation rose to 4.62% last month, climbing above the mid-point of the RBI's target range of 2%-6% for the first time in 15 months.

Many economists and analysts have lately begun to argue that rate cuts alone are expected to do little to revive growth and calls for more direct fiscal stimulus from the government have grown louder in recent weeks.

RBI Governor Shaktikanta Das told a news conference after the policy decision that both the central bank and government were committed to the revival of growth, but it was critical that monetary and fiscal policy work in tandem.

"For credit flow we've been taking various measures from the RBI end and if more measures are needed we will take them, but demand side measures will be part of the government's action plan," said Das. "What measures the government will take on the demand side, I can't spell out. It's the prerogative of the government to decide that."

Bond markets reacted negatively with the benchmark 10-year bond yield spiking sharply to 6.57% versus the pre-policy level of 6.47%, while the partially convertible rupee currency was trading at 71.52 per dollar, having eased slightly from 71.50 before the decision.

Equity markets initially reacted negatively, but pared losses and were up slightly in afternoon trading.

A Reuters poll of 70 economists had predicted the RBI would cut its repo rate by 25 bps and then by another 15 bps in the second quarter of 2020, where it will stay at least until 2021.

"RBI has finally thrown the ball back into the government's court to revive the economic engine ... But, this is a negative for the markets as a rate cut was required to boost risk taking appetite in the economy," said Jimeet Modi, chief executive of SAMCO Securities in Mumbai.

 

(Corrects headline, first and 6th paragraph to show growth projected at lowest in more than a decade not 7-yr low)

 

(Editing by Simon Cameron-Moore and Jon Boyle)