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Thursday, February 27, 2020

RBI keeps repo rate unchanged at 5.15 per cent, cuts 2019-20 GDP forecast to 5 per cent

The Reserve Bank of India (RBI) left its repo rate unchanged at 5.15 per cent and continued with its accommodative stance for supporting the economy. However, it reduced its GDP growth forecast for 2019-20 to 5 per cent from 6.1 per cent.

By: Express Web Desk | New Delhi | Updated: December 5, 2019 5:19:25 pm
The Reserve Bank of India (RBI) left its repo rate unchanged at 5.15 per cent but reduced its GDP growth forecast for 2019-20 to 5 per cent from 6.1 per cent. (File Photo)

The Reserve Bank of India (RBI) kept its repo rate unchanged Thursday at 5.15 per cent and continued with its accommodative stance for supporting the Indian economy. Apart from this, the central bank also sharply revised its GDP growth forecast for 2019-20 to 5 per cent from 6.1 per cent it had projected in its previous policy meeting in October.

“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 central bank said in a press release.

The RBI further said that it will continue with its accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target.

All six members of the Monetary Policy Committee (MPC) which comprise of Chetan Ghate, Pami Dua, Ravindra H. Dholakia, Michael Debabrata Patra, Bibhu Prasad Kanungo and the RBI Governor Shaktikanta Das had voted in favour of a pause in rate cuts.

Ever since Shaktikanta Das took over as the governor of the RBI, the central bank had reduced the key interest rates by 135 bps and even this time it was largely expected to cut interest rate by 25 basis points to boost growth.

The central bank also revised its inflation projection upwards to 5.1-4.7 per cent for the second half (H2) of the financial year 2019-20 and 4.0-3.8 per cent for the first half (H1) of 2020-21.

Growth

The Indian central bank also sharply lowered the growth forecast for the ongoing financial year 2019-20 to 5 per cent from its previous forecast of 6.1 per cent in October. It said the growth forecasts were lower due to weak domestic and external demand.

The GDP growth during the quarter that ended September stood at 4.5 per cent, hitting a 26-quarter low, owing to a contraction in manufacturing, weak investment, and lower consumption, data released last week by National Statistical Office showed.

“The 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 (2019-20) and 5.9-6.3 per cent for H1 2020-21,” the central bank said in its fifth bi-monthly statement of the ongoing financial year 2019-20.

While improved monetary transmission and a quick resolution of global trade tensions are possible upsides to growth projections, a delay in the revival of domestic demand, a further slowdown in global economic activity and geopolitical tensions are downside risks, the central bank said.

However, the RBI said that 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.

The RBI MPC noted that economic activity has weakened further and the output gap remains negative.

“Data on corporate finance and on projects sanctioned by banks and financial institutions suggest some early signs of recovery in investment activity, though its sustainability needs to be watched closely. The need at this juncture is to address impediments, which are holding back investments,” it added.

How analysts and economists reacted

“The outcome of the MPC meet of the RBI indicates that the RBI is worried about the rising inflation which may not come down till at least February 2020 and GDP may not rise materially till Q4FY20 as domestic and external demand conditions have remained weak. Hence it thought prudent not to cut rates at this juncture. Instead, it has nudged the Govt to cut interest rates on small savings scheme so that interest rate transmission becomes faster. Capacity utilization that has touched a low of 68.9% in Q2FY20 needs to revive soon. It has also tightened norms for UCBs. Though the stock market participants could be disappointed by the no-repo-rate-cut action, we think that the participants are mature enough to understand the prudence of the Central Bank which means that the markets may not react downwards sharply due to this disappointment,” Dhiraj Relli, MD & CEO, HDFC Securities said in a statement.

“It was an unexpected move with the RBI keeping the repo rate unchanged at 5.15 percent, as the market expected 25 bps cut in repo rate. With the RBI following a inflation targeting regime, the Central Bank focused on maintaining the inflation rate within the target range The rising food inflation posed a challenge to the Central Bank in cutting the rates. For instance, in October, food inflation stood at 6.93 percent. In the same month, vegetable prices registered a YoY growth rate of 26 percent. However, by maintaining the accommodative stance, there is room for rate cuts in the future,” Deepthi Mary Mathew, Economist at Geojit Financial Services said.

“With the surplus liquidity in the system, rates have already come down in market. Status-quo on repo rates is in a way positive for banks as they will not have to bring down their lending rates as per new repo rate linked loan pricing. Going forward, we see limited scope of repo rate reductions considering upward pressure on inflation,” Anusha Raheja, BFSI Research Analyst at LKP Securities said.

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