RBI keeps rates on hold in surprise move, slashes GDP forecast
Photo Credit: Reuters

The Reserve Bank of India kept its key lending rate on hold in a shock decision on Thursday, while sharply lowering its outlook for economic growth, forecasting the weakest expansion in years.

The RBI's monetary policy committee (MPC) has already cut rates five times this year, and had been widely expected to deliver a sixth cut on Thursday. While acknowledging that there was room to cut rates further, the panel said it was concerned about inflation in the near-term.

"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% and 4.9%, from an earlier forecast of 3.5%-3.7%.

India's economic growth fell to 4.5% in the July-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.

At the same time, annual retail inflation rose to 4.62% last month, climbing above 4% for the first time in 15 months, and taking headline inflation above the mid-point of the RBI's targeted range of 2%-6%.

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."

The six-member monetary policy committee (MPC) unanimously voted to hold the key repo rate at 5.15% while the reverse repo rate was also held at 4.90%.

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.

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 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.

Bond markets reacted negatively with the benchmark 10-year bond yield spiking sharply to 6.591% versus the pre-policy level of 6.4735%, while the partially convertible rupee currency was trading at 71.55 per dollar, having eased slightly from 71.50 before the decision. Equity markets initially reacted negatively, but pared losses to trade flat.

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.

"While the decision to pause is not entirely unjustified given the clear lack of efficacy of monetary policy actions through the policy rate cut channel, what was worrying is that the RBI did not announce any unconventional measures, but hoped for better transmission of its past actions," said Kunal Kundu, India economist for Societe Generale.

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