RBI policy: Repo rate unchanged at 5.15%; FY21 GDP growth projected at 6%

Reserve Bank of India (RBI) Governor Shaktikanta Das at the RBI's sixth bi-monthly monetary policy review meeting of 2019-20, in Mumbai (Photo- Kamlesh Pednekar)
The monetary policy committee (MPC) of the Reserve Bank of India (RBI) on Thursday kept the repo rate unchanged at 5.15 per cent — a 10-year low in its last policy review of the financial year 2019-20 (FY20).

Consequently, the reverse repo rate stands unchanged at 4.90 per cent.

Further, the bank said it will maintain 'accommodative' policy stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target.

The committee voted 6-0 in favour of the status quo of the interest rates.

GDP growth forecast for the financial year 2020-21 (FY21) is projected at 6 per cent and in the range of 5.5-6.0 per cent in the first half of the next fiscal and 6.2 per cent in Q3 (October-December period). GDP growth for FY 2019-20 is seen at 5.0 per cent.

The CPI inflation projection has been revised upwards to 6.5 per cent for Q4:2019-20; 5.4-5.0 per cent for H1:2020-21; and 3.2 per cent for Q3:2020-21, MPC said in its release. The MPC noted that inflation surged above the upper tolerance band around the target in December 2019, primarily on the back of the unusual spike in onion prices. However, going ahead onion prices are likely to ease on the improvement in supply conditions.

"Going forward, the trajectory of inflation excluding food and fuel needs to be carefully monitored as the pass-through of remaining revisions in mobile phone charges, the increase in prices of drugs and pharmaceuticals and the impact of new emission norms play out and feed into inflation formation," the statement added.

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.

Addressing media, RBI Governor Shaktikanta Das said that the repeat of status quo should not be seen as an indicator of future action. He further said that economy remains weak and the output gap is negative. The RBI governor further said that 
transmission to credit markets are improving gradually and monetary transmission should help boost demand. 

"Have many instruments at our disposal to address the slowdown,"  Das added. 

Meanwhile, the RBI announced that the CRR (Cash reserve ratio) will fall for every incremental loan given. CRR leeway on new consumer loans will be applicable till July 31. 

In its last policy meet, the central bank had maintained the repo rate at 5.15 per cent points (bps). However, GDP growth forecast for FY20 was slashed to 5 per cent from 6.1 per cent.

WHAT ANALYSTS SAY

Dr Joseph Thomas, Head of Research  at Emkay Wealth Management said at this juncture, rate modification is actually not required as the interbank market has a huge surplus of close Rs 3 lakh crore to support the liquidity requirements of the system, and this alone will ensure that the short-term rates do not move up. "The status quo comes as a relief to the short end of the curve, but the pressures at the long end may persist for longer time," Thomas added. 

"It was an expected move by the RBI, maintaining the repo rate unchanged at 5.15 per cent. With the inflation rate breaching the upper band, it will take time for the Central Bank to revive the rate cuts. By maintaining the accommodative stance, there is scope for rate cuts once the inflation rate falls back to a comfortable level," said Deepthi Mary Mathew, Economist at Geojit Financial Services.

Foreign brokerage firm Nomura expects GDP growth to slow further to 4.3 per cent in Q4 2019 from 4.5 per cent in Q3, and see a below-trend growth of 5.7 per cent in FY21 from 4.7 per cent in FY20. "We see the current inflation spike as transitory and expect a lack of fiscal activism to open up monetary policy space. We also expect the RBI to leave policy rates unchanged and retain its accommodative stance, but signal future easing; we expect a 25bp rate cut in Q2 2020," it had said in its policy review note.

Analysts at Brickwork Ratings had anticipated the slump in GDP growth has bottomed out to 5 per cent in 2019-20 and expected to rebound in 2020-21 to 5.5-6 per cent, aided by the government measures and the transmission of past rate cuts.


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