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Amidst slowing economic growth, the Reserve Bank of India on Thursday decided to keep the repo rate unchanged at 5.15 per cent as it also weighed into concerns over rising inflation. The decision was taken at the fifth bi-monthly meeting of the Monetary Policy Committee led by RBI Governor Shaktikanta Das.
“The MPC notes that economic activity has weakened further and the output gap remains negative. 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,” it said, while adding that it recognizes 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 said.
The MPC will continue with the accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target.
Till now the RBI had cut rate five times in eight months as it looked to bolster lagging growth by spurring demand with the last being a 25 basis point cut in October.
Also read:Rupee drops 8 paise as RBI leaves repo unchanged at 5.15 per cent
The RBI revised its retail inflation projection upwards to 5.1-4.7 per cent for the second half of the fiscal and 4 per cent 3.8 per cent for the first half of 2020-21, with risks broadly balanced.
It also cut the GDP growth projection for 2019-20 to 5 per cent from 6.1 per cent in the October policy , with a forecast of 4.9-5.5 per cent in the second half of the fiscal and 5.9-6.3 per cent for the first jhalf of 2020-21.
All members of the MPC voted in favour of the decision. There is space for further rate reduction going forward, the RBI said.
Growth slows
The RBI sharply lowered the growth forecast for the current financial year to 5 per cent from the earlier estimate of 6.1 per cent on account weak domestic and external demand.
India’s economic growth according to government data has slipped to over six-year low of 4.5 per cent in the second quarter of the current fiscal mainly due to contraction in manufacturing sector output.
“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 (this fiscal) and 5.9-6.3 per cent for H1(2020-21),” RBI said in its fifth bi-monthly monetary policy review.
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.
Also read:RBI’s monetary policy statement: Highlights
The 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, it added.
The MPC noted that economic activity had weakened and the output gap remained negative. 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, it said.
“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 said.
Foreign exchange reserves surge
Foreign exchange reserves continue the upward journey surging to a new high of USD 451.7 billion as of December 3, the Reserve Bank Governor Shaktikanta Das said. Since the beginning of the current fiscal, the forex kitty has gained by USD38.8 billion as of December 3, the largest in recent year, he added.
The total reserves had risen by USD 347 million to USD 448.596 billion in the week to November 22, the last reported number by the RBI.
The reserves have been surging to new highs every week for the last few months and this is the first time that they have crossed the USD 450 billion mark.
Monetary transmission has been reasonably swift, says Das
Das also expressed satisfaction with bankers for passing its rate cuts to borrowers, saying that the monetary transmission has been full and reasonably swift. He further said transmission, which was bothering the central bank for a long time, is expected to improve with the introduction of linking loan pricing to external benchmark system, which banks have adopted now.
Das said the weighted average lending rate has gone down by 44 basis points on the fresh rupee loans. He also said there are indications of the capex cycle, a sluggishness in which is hurting economic growth, turning up.
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