RBI on hold despite weak growth and inflation

Andrew Cummings
December 6, 2019

The Reserve Bank of India, RBI, will release its fifth bi-monthly Monetary Policy Statement for 2019-20, today.

"For credit flow we've been taking various measures from the RBI end and if more measures are needed we will take them, but demand side measures will be part of the government's action plan", said Das.

High inflation prevented India's central bank from cutting rates for a sixth time Thursday, while it slashed its annual growth forecast as the government struggles to jumpstart the economy.

The Reserve Bank of India (RBI) said the benchmark repo rate - the level at which it lends to commercial banks - would remain unchanged at 5.15 percent, a nine-year low. The reverse repo rate is at 4.90 percent and bank rate at 5.40 percent.

The current situation index fell to 85.7 in November from 89.4 in September, according to the Reserve Bank of India's consumer confidence survey, where 100 is the dividing line between pessimism and optimism. While the RBI had cut repo rates by 135 basis points (bps) in five policy reviews in 2019, the one-year median marginal cost of funds-based lending rate (MCLR) has declined by only 49 bps. The MPC however lowered its growth forecast to 5 per cent for the current financial year while maintaining an "accommodative" stance, after inflation breached its medium-term target of 4 per cent for the first time in October after 15 months.

The panel made a decision to maintain the accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within target limits. The weighted average lending rate (WALR) on fresh rupee loans sanctioned by banks declined by only 44 bps. Acknowledging the dismal growth in the second quarter, the MPC has revised the growth projections for fiscal 2019-20 sharply downwards to 5% from the 6.1% it had projected in the October policy.

Commenting on the outlook for growth, the RBI said that "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".

The committee said growth had slowed down and inflation was expected to rise in the near term and moderate below the target only by July-September 2020. "Similarly, the forthcoming Union Budget will provide better insight into further measures to be undertaken by the Government and their impact on growth".

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