RBI policy: MPC springs a surprise; keeps repo rate unchanged at 5.15%

Daniel Fowler
December 5, 2019

Disappointing markets and borrowers, the Reserve Bank of India's (RBI's) monetary policy committee on Thursday chose to hold its repo rate - the rate at which it lends to banks - at 5.15%.

The central bank raised its inflation forecast to 4.7% to 5.1% for the half year between October 2019 and March 2020, and slashed its GDP growth forecast from 6.1% to 5.0% for the year through next March.

On the positive side, however, it said, 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 monetary policy committee (MPC) said "a number of commercial banks, urban cooperative banks and other regulated entities are dependent upon third party application service providers for shared services for ATM Switch applications. Accordingly, the MPC chose to keep the policy repo rate unchanged and continue with the accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target", the committee said in a statement.

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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. "The need at this juncture is to address impediments, which are holding abck investments".

And while loans get cheaper for the people, the banks also reduce the interest rates on deposits.

Contrary to RBI's decision, analysts had expected the apex bank to cut the repo rate by 25 basis amid the declining GDP growth. It has repeatedly said that the lower rates have not yet been passed on to borrowers. "The median term deposit rate has declined by 47 bps during February-November 2019". But, consumer price index (CPI)-based inflation for September jumped sharply by 71 basis points to 4 per cent. In October, food inflation soared to 7.9% from below zero at the beginning of the year.

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