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RBI keeps repo rate unchanged at 5.15%, stance remains accommodative

The central bank slashed FY20 real GDP growth projection to 5% from 6.1%.

ETMarkets.com|
Updated: Dec 05, 2019, 05.41 PM IST
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5 reasons why RBI didn't go for rate cut
5 reasons why RBI didn't go for rate cut
NEW DELHI: The Reserve Bank of India (RBI) Governor Shaktikanta Das-headed monetary policy committee (MPC) on Thursday maintained status quo on policy rates in its fifth bi-monthly monetary policy review of the financial year.

This halt came after five consecutive cuts. The short-term lending rate, or repo rate, was unchanged at 5.15 per cent. All six committee members voted against the rate cut.

The RBI said its monetary stance will remain accommodative as long as it necessary. The central bank raised October-March CPI projection from 4.7 per cent to 5.1 per cent.

FY20 real GDP growth projection cut to 5 per cent from 6.1 per cent.

“GDP growth for Q2 turned out to be significantly lower than projected. Various high frequency indicators suggest that domestic and external demand conditions have remained weak. Based on the early results, the business expectations index of the Reserve Bank’s industrial outlook survey indicates a marginal pickup in business sentiments in Q4,” RBI said in a statement.

Key highlights
  • MPC unanimously votes for status quo on repo rate
  • Stance to remain accomodative as long as required: MPC
  • FY20 real GDP growth projection lowered to 5% from 6.1%
  • MPC sees scope for rate easing in the future
  • MPC expects inflation to rise in the near term
  • Delay in demand revival is a key downside risk to GDP
  • MPC sees need to address impediments holding back investments
  • October CPI print was much higher than expected
  • Fall in deposit rate augurs well for loan rate transmission
  • October-March 2020 CPI inflation seen at 4.7-5.1%
  • April-Sept 2020 CPI inflation seen 3.8-4%
  • Oct-March GDP growth seen at 4.9-5.5%
  • Fall in deposit rate augurs well for rate transmission

“On the positive side, however, monetary policy easing since February 2019 and the measures initiated by the government over the last few months are expected to revive sentiment and spur domestic demand. Taking into consideration these factors, real GDP growth for 2019-20 is revised downwards from 6.1 per cent in the October policy to 5.0 per cent – 4.9-5.5 per cent in H2 and 5.9-6.3 per cent for H1:2020-21,” it added.

The RBI said that 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, it said.

The MPC said that the actual inflation outcome for Q2 evolved broadly in line with projections – averaging 3.5 per cent. "The inflation print for October, however, was much higher than expected," it said.

While the RBI committee members recognises that there is monetary policy space for future action, given the evolving growth-inflation dynamics, they felt it appropriate to take a pause at this juncture.

“Inflation is rising in the near-term, but it is likely to moderate below target by Q2 of FY21. It is, therefore, prudent to carefully monitor incoming data to gain clarity on the inflation outlook. Similarly, the forthcoming union budget will provide better insight into further measures to be undertaken by the Government and their impact on growth,” RBI said.

Benchmark equity index BSE Sensex lost more than 150 points from day’s high after RBI move.

The decision was made even as GDP fell to a 6-year low of 4.5 per cent in the September quarter. A few economists said that an aggressive rate cut was unlikely as the headline inflation now stands at around 4.6 per cent, above the RBI’s target, mainly on account of higher food inflation.

Real interest rates continued to be high compared to history and also by international standards, said Edelweiss Professional Investor Research.

This is even as RBI has cut the policy rate by 135 basis points basis points so far this calendar.

Brokerage Nomura said that while weaker global growth is a common thread across economies, India’s sharper-than-expected growth slump, despite being a relatively closed economy, suggests that domestic factors have played a bigger role.

It added that while the slowdown reflects a painful convergence of tight domestic credit conditions amid the triple balance sheet impairment of corporates, banks and shadow banks, the forward-looking data do not suggest much room for optimism.

“October activity data released so far remain weak. Despite the expected festive boost in October, vehicle sales growth has been largely lacklustre, particularly among commercial vehicles and two-wheelers. The credit slump is still ongoing, with bank non-food credit growth slowing further to 7.9 per cent YoY in the first week of November from 8.9 per cent in October,” it said.
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