RBI denies Rate Cut this time

BE/RBINOTE/59/2019

On 5^th December 2019 the Monetary Committee meeting of the Reserve Bank of India n surprisingly hit a pause button on cutting interest rate as it gave more importance to prevailing inflation pressure and rising food prices over a worrying slowdown in the economy.

• So far in 2019 five consecutive cuts in interest rates have come up. The six-member monetary policy committee, headed by RBI Governor Shaktikanta Das, unanimously voted to hold the key repo rate at 5.15 per cent and reverse repo rate at 4.90 per cent.
• There was wide scope expectation from Bankers and economists that the central bank might cut rates for the sixth time to support a slowing economy, whose growth rate slipped to a six-year low of 4.5 per cent in the September quarter from 7 per cent a year back.
• On the contrary, the RBI reiterated that it would maintain an accommodative stance as long as necessary to revive economic growth but cut its GDP growth forecast to 5 per cent for the 2019-20 fiscal from the earlier estimate of 6.1 per cent.
• The RBI Governor added that the pause was temporary and the central bank wanted to assess the effect of its policy after reduction of 135 basis points in five policies this year.
• Also he said that the Banks have passed on only 44 basis points of the rate cuts to borrowers and there is space available for further monetary policy action and that maximise the impact of rate reductions.
• According to RBI, the need at this juncture is to address shortcomings, which are holding back investments in the economy.
• The RBI Governor also remarked that the central bank cannot “mechanically” keep cutting interest rates every time and before taking a call on rates, it will wait for the impact of the coordinated measures taken by the Government and the RBI over the past few months to push growth to play out.
• The recent measures initiated by the Government are expected to help in reviving the sentiments and offshoot domestic demand which is being blamed as prime reasons for the slowdown.
• The Governor also commented that there is good coordination between the fiscal and monetary policies so far in addressing growth concerns and that the RBI is not concerned about Government missing fiscal deficit target.
• The MPC released a statement stating that while it recognises that there is monetary policy space for future action, given the evolving growth-inflation dynamics, the committee felt it appropriate to take a pause at this juncture.
• The RBI Governor also felt that this was a “temporary pause” in the interest rate cutting cycle and the MPC will be above to come out with its decision in February after more data flows in and the Government releases its Budget for 2020-21.

Remarks:

1. Stating that headline inflation at 4.6 per cent in October was “much higher than expected,” the central bank raised upwards its inflation forecast for the second half of the fiscal year to 5.1-4.7 per cent from 3.5-3.7 per cent seen previously.
2. For the first time in more than a year, inflation in October breached the RBI’s 4 per cent medium-term target.
3. This was primarily due to uptick in prices of vegetables such as onion and tomatoes, as per RBI Statement.