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Published on 6/12/2019 10:37:28 AM | Source: Dion Global Solutions Ltd

RBI unexpectedly hits pause on rate cut; lowers FY20 GDP forecast to 5%

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The Reserve Bank of India on Thursday unexpectedly hit a pause button on cutting interest rate as it gave more importance to prevailing inflation pressure and rising food prices over a worrying slowdown in the economy. After five consecutive cuts in interest rates this year, the six-member Monetary Policy Committee (MPC), headed by RBI Governor Shaktikanta Das, unanimously voted to hold the key repo rate at 5.15 per cent and reverse repo rate at 4.90 per cent. Bankers and economists had widely expected the central bank to cut rates for the sixth time to support a slowing economy, whose growth rate slipped to a six-year low of 4.5 per cent in the September quarter from 7 per cent a year back. The RBI reiterated that it would maintain an accommodative stance as long as necessary to revive economic growth but cut its GDP growth forecast to 5 per cent for the 2019-20 fiscal from the earlier estimate of 6.1 per cent.

Das said the pause was temporary and the central bank wanted to assess the effect of its policy after reduction of 135 basis points in five policies this year. Banks have passed on only 44 basis points of the rate cuts to borrowers, he said. "There is space available for further monetary policy action," Das told reporters here, adding that there is a need to "maximise the impact of rate reductions". According to the RBI, the need at this juncture is to address impediments, which are holding back investments in the economy.

Das said the central bank cannot "mechanically" keep cutting interest rates every time and that it will wait for the impact of the coordinated measures taken by the government and the RBI over the past few months to push growth to play out before taking a call on rates. While there are green shoots in the economy, it is too early to take a call on their sustainability, Das said. The recent measures initiated by the government will help to revive sentiment and spur domestic demand, which is being blamed as prime reasons for the slowdown, he added.

Further, Das said there is good coordination between the fiscal and monetary policies so far in addressing growth concerns and that the RBI is not worried about government missing fiscal deficit target. "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 MPC said in a statement. Das said this was a "temporary pause" in the interest rate cutting cycle and the MPC will be better placed to decide on it in February after more data comes in and the government brings out its Budget for 2020-21. "Let the impact of 135 basis point cut play out more," he said and emphasised that timing was important rather than mechanically cutting rates.

Stating that headline inflation at 4.6 per cent in October was "much higher than expected," the central bank raised upwards its inflation forecast for the second half of the fiscal year to 5.1-4.7 per cent from 3.5-3.7 per cent seen previously. For the first time in more than a year, inflation in October breached the RBI's 4 per cent medium-term target. This was primarily due to uptick in prices of vegetables such as onion and tomatoes, Das said.