RBI keeps repo rate unchanged; lowers growth forecast
While many expected the Reserve Bank of India (RBI) to slash repo rates in December, the central bank, in a surprise move, kept them unchanged. The repo rate is the rate at which RBI lends short-term funds to commercial banks. However, the RBI has lowered its GDP growth projection to 5% for the current fiscal year. Here are more details.
RBI retains 5.15% repo rate; reverse repo rate at 4.9%
The RBI's six-member Monetary Policy Committee (MPC) unanimously decided to retain the repo rates at 5.15%. The reverse repo rate stands at 4.9%. The MPC comprises RBI Governor Shaktikanta Das, Deputy Governor Bibhu Prasad Kanungo and Michael Patra as RBI nominees, along with Chetan Ghate, Pami Dua and Ravindra Dholakia as external members. This is the first pause after five consecutive rate cuts.
There is monetary policy space for future action: RBI
An RBI statement said, "The MPC recognizes 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." It added, "The MPC also decided to continue with the accommodative stance as long as it is necessary to revive growth while ensuring that inflation remains within the target."
GDP growth rate fell to 4.5%
The lowered GDP growth outlook also comes at a time when the GDP growth rate has plunged to 4.5%, a 26-quarter low, owing to weakened consumer demand and reduced manufacturing activity. The slowdown had led economists to predict another repo rate cut.
GDP growth outlook lowered to 5%
Further, the RBI also lowered its Gross Domestic Product (GDP) growth projection to 5% for FY20. In the October policy, the GDP growth forecast was lowered to 6.1%. The consumer price index (CPI) inflation projection was increased to 5.1-4.7% for the second half for the current fiscal year, and to 4.0-3.8% for the first half of 2020-21 fiscal.
Between February-October, RBI cut repo rates by 135 bps
Quite worryingly, between February and October 2019, the RBI had reduced repo rates by a collective 135 basis points. However, despite the consecutive repo rate cuts by RBI, the lending activity is yet to pick up in India. A Reuters poll of 70 economists had predicted that the RBI will cut repo rates by 25 bps in the December policy.
'Government, RBI measures to gradually feed into real economy'
The RBI statement further said, "The MPC notes that economic activity has weakened further and the output gap remains negative." It added, "However, several measures already initiated by the Government and the monetary easing undertaken by the Reserve Bank since February 2019 are gradually expected to further feed into the real economy." The RBI also looks forward to the forthcoming Union Budget.