RBI keeps repo rate steady at 5.15%, pegs growth at 6% for next fiscal
This is the second consecutive bi-monthly meeting of the Monetary Policy Committee in this fiscal year 2019-20 in which the repo rate has been kept unchanged.
The Reserve Bank of India (RBI) on Thursday kept its repo rate at which it lends to banks unchanged at 5.15% as it maintained an “accommodative stance” to revive growth amid a sagging economy and avoid adding to the already high inflation levels.
The central bank also projected a gross domestic product (GDP) growth rate of 6% for the next financial year starting April 1 and retaining the estimate for the current financial year at 5% as it said the economy continues to be weak and the output gap remains negative.
This is the second consecutive bi-monthly meeting of its Monetary Policy Committee (MPC) in this fiscal year 2019-20 in which the repo rate has been kept unchanged. RBI had in December last year kept interest rates unchanged after five consecutive cuts.
ALSO WATCH | RBI keeps repo rate steady at 5.15% amid ‘elevated inflation pressures’
“The MPC also decided to continue with the accommodative stance as long as it is necessary to revive growth while ensuring that inflation remains within the target,” RBI said in a press release.
All the six MPC members led by RBI governor Shaktikanta Das unanimously voted to keep the repo rate and its stance unchanged.
“Given the evolving growth-inflation dynamics, the MPC felt it appropriate to maintain the status quo. Accordingly, the MPC decided to keep the policy repo rate unchanged and persevere with the accommodative stance as long as necessary to revive growth, while ensuring that inflation remains within the target,” it said.
The reverse repo rate at which RBI borrows from banks too was kept unchanged at 4.90% and the marginal standing facility (MSF) rate and the bank rate at 5.40%, the central bank said in a statement.
The decision on the rates is the first after the Union Budget was presented on February 1 as the government announced huge packages for farming and infrastructure.
The Indian economy is forecast to grow at the rate of 5% in the year ending in March—the weakest pace in 11 years. However, the economy has recently shown signs of recovery.
Outlook on growth, inflation
The RBI has revised upwards its consumer price index (CPI) inflation projection 6.5% for the last quarter of the current fiscal.
“The MPC notes that inflation has surged above the upper tolerance band around the target in December 2019, primarily on the back of the unusual spike in onion prices. Over the coming weeks and months, onion prices are likely to ebb as supply conditions improve,” it said.
Other factors that RBI expects will pressurise CPI to move upwards are “hardening of prices of other food items” specifically pulses and proteins also adjustments to the telecom charges and increase in prices of drugs and pharmaceuticals among other factors.
The monetary policy committee anticipates that these factors will keep the headline inflation elevated during the first half of the next fiscal.
“Overall, the inflation outlook remains highly uncertain. Accordingly, the MPC will remain vigilant about the potential generalisation of inflationary pressures as several of the underlying factors cited earlier appear to be operating in concert,” said the central bank.
The central bank’s decision is followed by a weak growth environment and high inflation numbers reported in the previous month.
Retail inflation rose to 7.35% in December. India’s growth rate slowed to 4.5% in the September quarter as compared to 5% in the first quarter of the current fiscal.
Moody’s, a credit ratings firm, has estimated that the current fiscal ending March 31 will record a GDP growth rate of 4.9%, slightly lower than the government’s estimate of 5%.
The real GDP growth projected in the December policy was 5% for the current fiscal.
The growth outlook, says RBI, will be influenced by various factors. The central bank expects private consumption to recover on the backdrop of improved Rabi prospects and expected rise in food prices to support rural incomes.
Monetary transmission in terms of reduction in lending rates and financial flows to the commercial sector could spur investment and consumption demand and rationalisation of personal tax rates could spur domestic demand.
