RBI Keeps Rates on Hold Despite Economy Fears

Daniel Fowler
December 6, 2019

The government had last week said the GDP growth in September 2019 quarter had plunged to 4.5 per cent, the lowest since the three months ended March 2013. This year, the RBI has already cut the repo rate by 135 basis points to a nine-year low.

The report further noted that the macro mix for India has deteriorated further lately, with the RBI revising FY 2019/20 growth down to 5.0 percent (6.1 percent previously) while bringing its CPI forecasts for H2 FY2019/20 up to 5.1 percent (4.7 percent previously).

A message to the spokesperson of the Confederation of Indian Industry, which usually issues a statement, was not replied to, while various senior corporate executives said "no comments" when a reaction to the RBI's action was sought. "Given the evolving growth-inflation dynamics, the MPC felt it appropriate to take a pause at this juncture". "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 RBI said.

While the decision to keep the repo rate at 5.15 per cent was unexpected, the MPC said it will "continue with the accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target".

The central bank's survey was conducted in 13 big cities and 5,334 households. Bond yields rise when prices fall.

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"But RBI's accommodative stance is unchanged, so it could still cut rates during the next monetary policy meeting in February (2020)" he added.

"We don't expect this decision to completely change the trend of the market except for consolidation in rate-sensitive stocks in the short term, " he said.

"The market feels that given the revised inflation target set by RBI, the likelihood of a prolonged period of no rate cut is high", he said. Das obviously thus wants to wait and see how stubborn the rise in inflation could be and the action the bank will then want to take.

The RBI panel also indicated that various high frequency indicators suggest that domestic and external demand conditions have remained weak. The central bank now expects inflation at 5.1-4.7 per cent in second half of the current financial year, and 4.0-3.8 per cent in the first half of financial year 2020-21.

But debt-ridden banks have not reduced their lending rates, and so failed to pass on the benefits to consumers.

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