RBI disappoints markets and borrowers, keeps rates
MUMBAI: Disappointing markets and borrowers, the monetary policy committee of the Reserve Bank of India (RBI) decided on Thursday to maintain its repurchase rate, the rate at which it lends to banks by 5.15%, even when it cut its forecast of growth in 90 basis points to 5% of the previous 6%. It was widely expected that the central bank would reduce its repurchase rate by 25 basis points (bp) to a minimum of ten years.
Despite the lower growth momentum, RBI said inflation would be higher than expected and would be in the range of 5.1% to 4.7%. RBI had already reduced rates five consecutive times in its previous policies in 2019, resulting in cumulative reductions of 135 basis points. It has been repeatedly said that lower rates have not yet been transferred to borrowers.
When unanimously deciding to keep rates, the six-member MPC seems to be sending a message that there is a lot that monetary policy can do and that the ball is now on the center court. “Right now, the need is to address the impediments, which are blocking abck's investments.
The introduction of external benchmarks is expected to strengthen monetary transmission. In this context, there is also a need for greater flexibility in adjusting interest rates in small savings plans. In the MPC's opinion, inflation is rising in the short term, but it is likely to moderate below the target in the second quarter: 2020-21.
Therefore, it is prudent to carefully monitor incoming data to obtain clarity on inflation outlook. Similarly, the next union budget will provide a better insight into the additional measures that the Government must take and its impact on growth, ”the RBI said in its policy statement.