RBI cuts the growth forecast, leaves the key rate unchanged

MUMBAI: The Monetary Policy Committee (MPC) of the Reserve Bank of India on Thursday cut its estimate of GDP growth, but disappointed markets and borrowers by keeping their key policy rate unchanged after reducing it five times consecutive in 2019.

It was widely expected that the central bank would reduce its repurchase rate, which it lends to banks, by 25 basis points, to a minimum of 10 years of 4.9%. RBI kept the repurchase rate at 5.15% even when it reduced its estimate of GDP growth for 2019-20 by 110 basis points to 5% from the 6.1% forecast two months earlier. Despite the lower growth, RBI said inflation would be higher than expected, in the range of 4.7% to 5.1%.

RBI Governor Shaktikanta Das He explained that the previous rate cuts resulting in a cumulative reduction of 135 basis points have not yet been transferred to the borrowers.

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The MPC recognizes that there is monetary policy space for future actions, ”the panel said in a statement. However, given the dynamic growth-inflation dynamics, the MPC considered it appropriate to pause at this juncture.

Das also indicated that the RBI was keeping its powder dry for a more convenient time. The impact must be optimized and maximized, making it a matter of time, which is very important, rather than reducing rates mechanically on each occasion, Das said in his post-policy press conference.

Although they were taken completely by surprise, most bankers do not see RBI's decision to stop as a negative. The announcement of the RBI unchanged interest rate means a wait and see position to understand the market and the government's reaction to rapidly developing market data. The bond market and the money market are likely to be more stable until the government's fiscal policies and measures are announced, ”said Mrutyunjay Mahapatra, MD and CEO, Syndicate Bank. As deposit rates moderate, it is expected that the transmission of previous rate cuts by banks will continue further, he added.

When unanimously deciding to hold on to the 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. “The need at this time is to address the impediments, which are holding back investments. In this context, there is also a need for greater flexibility in adjusting interest rates in small savings plans, the committee said in its monetary policy statement.

“The trajectory of inflation was a key reason for the break. According to RBI, they believe that due to food inflation, CPI inflation is likely to remain high in the fourth quarter of AF19-20 and inflation will decrease only after that, ”said Shanti Ekambaram, president of banking at consumption, Kotak Mahindra Bank.

The RBI also cited many uncertainties between now and March 2020 with the upcoming Union Budget that provides a better understanding of the measures that the government must take and its impact on growth and the fiscal deficit, he added.