RBI keeps rates on hold despite economy fears

The six-member monetary policy committee (MPC) unanimously voted to hold the key repo rate at 5.15% while the reverse repo rate was also held at 4.90%.The RBI reiterated that it would maintain an accommodative stance as long as it is necessary to revive economic growth which slowed to 4.5% in the September quarter from 7% a year ago, to stand at its lowest in more than six years.

 

MUMBAI:

The Reserve Bank of India (RBI) kept its key lending rate on hold in a surprise decision on Thursday, despite a worrying slowdown in the country that prompted the central bank to sharply reduce its economic growth forecast to 5% for the year through March.

 

The six-member monetary policy committee (MPC) unanimously voted to hold the key repo rate at 5.15% while the reverse repo rate was also held at 4.90%.The RBI reiterated that it would maintain an accommodative stance as long as it is necessary to revive economic growth which slowed to 4.5% in the September quarter from 7% a year ago, to stand at its lowest in more than six years.

 

“The MPC recognises that there is monetary policy space for future action. However, given the evolving growth-inflation dynamics, the MPC felt it appropriate to take a pause at this juncture,” the committee said in a statement.

 

A Reuters poll of 70 economists had predicted the RBI would cut its repo rate by 25 bps and then by another 15 bps in the second quarter of 2020, where it will stay at least until 2021.

 

“In the Monetary Policy announcement today, RBI left rates unchanged, a big surprise against market expectations of at least 25 bps rate cut. The move left markets scrambling and bond market bulls were caught on the wrong foot.Taking into account the continuing slowdown including the high-frequency indicators,  RBI further revised its growth projections for FY20 downwards from 6.1% in the October policy to 5%. Thus, in the past 4 months, growth expectations are down from 7% to 5%, said Mihir Vora, director & chief investment officer, Max Life Insurance.

 

The message to the Government is also clear. RBI has supported growth through preemptive measures including rate cuts and now the ball is in the Government’s court to do more to revive growth, he said adding that recently announced corporate tax cuts along with lower interest rates should aid in private capex revival going forward.

 

With more banks and housing finance companies pegging lending rates with policy rates, and the fact that liquidity in the system is now in surplus, transmission of the cumulative 135 basis points rate cuts over the past 11 months should happen,he said.

 

Sudhakar Shanbhag, chief investment officer, Kotak Mahindra Life Insurance said “ Against an almost consensus market expectation of a rate cut based on the slowdown seen in growth, the MPC seems to have chosen to focus on its mandate of inflation management and have recognised that the latest CPI print and expected prints over next few months would be higher than their targeted level and also a belief that past rate cuts will help to support growth with focus on transmission. ”

 


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