RBI unexpectedly hits pause on interest rate cut; lowers FY20 GDP growth forecast to 5%

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Reserve Bank of India raises inflation projection for H2 FY20 on spike in vegetable prices

MUMBAI, Dec 5 (AGENCIES): The Reserve Bank of India on Thursday unexpectedly hit a pause button on cutting interest rate as it gave more importance to prevailing inflation pressure and rising food prices over a worrying slowdown in the economy.

After five consecutive cuts in interest rates this year, the six-member Monetary Policy Committee (MPC), headed by RBI Governor Shaktikanta Das, unanimously voted to hold the key repo rate at 5.15 per cent and reverse repo rate at 4.90 per cent. Bankers and economists had widely expected the central bank to cut rates for the sixth time to support a slowing economy, whose growth rate slipped to a six-year low of 4.5 per cent in the September quarter from 7 per cent a year back.

The RBI reiterated that it would maintain an accommodative stance as long as necessary to revive economic growth but cut its GDP growth forecast to 5 per cent for the 2019-20 fiscal from the earlier estimate of 6.1 per cent. Das said the pause was temporary and the central bank wanted to assess the effect of its policy after reduction of 135 basis points in five policies this year. Banks have passed on only 44 basis points of the rate cuts to borrowers, he said.

The Reserve Bank of India (RBI) on Thursday raised its inflation projection to 5.1-4.7 per cent for the second half of the current fiscal on the back of spike in prices of vegetables such as onion and tomatoes. The central bank had earlier estimated headline inflation at 3.5-3.7 per cent for the second half of the ongoing fiscal.

“Going forward, the inflation outlook is likely to be influenced by several factors. First, the upsurge in prices of vegetables is likely to continue in immediate months; however, a pick-up in arrivals from the late kharif season along with measures taken by the government to augment supply through imports should help soften vegetables prices by early February 2020,” the RBI said in its fifth bi-monthly monetary policy review of the fiscal.

There are incipient price pressures seen in other food items such as milk, pulses, and sugar likely to be sustained, with implications for the trajectory of food inflation, it said. Retail inflation increased sharply to 4.6 per cent in October, propelled by a surge in food prices.

Talking about drivers of the Consumer Price Index (CPI), it said, food inflation spiked to 6.9 per cent in October – a 39-month high – pushed up by a sharp increase in prices of vegetables due to heavy unseasonal rains. Prices of onions, in particular, shot up by 45.3 per cent in September and further by 19.6 per cent in October, it said.

Inflation in several other food items such as fruits, milk, pulses and cereals also increased, reflecting diverse factors – the cost push of fodder prices in the case of milk; decline in production and sowing area of pulses; and minimum support price effects. Sugar and confectionery prices moved out of deflation in October as sugarcane output shrank on an annual basis, it said.

However, it said domestic demand has slowed down, which is being reflected in the softening of inflation excluding food and fuel. Crude oil prices are expected to remain range bound, barring any supply disruptions due to geo-political tensions.

“Taking into consideration these factors, the CPI inflation projection is revised upwards to 5.1-4.7 per cent for H2 of 2019-20 and 4.0-3.8 per cent for H1 of 2020-21, with risks broadly balanced,” it said. It is, therefore, prudent to carefully monitor incoming data to gain clarity on the inflation outlook.

“Similarly, the forthcoming union budget will provide better insight into further measures to be undertaken by the Government and their impact on growth,” it said.

“There is space available for further monetary policy action,” Das told reporters here, adding that there is a need to “maximise the impact of rate reductions”.

According to the RBI, the need at this juncture is to address impediments, which are holding back investments in the economy. Das said the central bank cannot “mechanically” keep cutting interest rates every time and that it will wait for the impact of the coordinated measures taken by the government and the RBI over the past few months to push growth to play out before taking a call on rates.

While there are green shoots in the economy, it is too early to take a call on their sustainability, Das said. The recent measures initiated by the government will help to revive sentiment and spur domestic demand, which is being blamed as prime reasons for the slowdown, he added.

Further, Das said there is good coordination between the fiscal and monetary policies so far in addressing growth concerns and that the RBI is not worried about government missing fiscal deficit target.

“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 MPC said in a statement. Das said this was a “temporary pause” in the interest rate cutting cycle and the MPC will be better placed to decide on it in February after more data comes in and the government brings out its Budget for 2020-21.

“Let the impact of 135 basis point cut play out more,” he said and emphasised that timing was important rather than mechanically cutting rates. Stating that headline inflation at 4.6 per cent in October was “much higher than expected,” the central bank raised upwards its inflation forecast for the second half of the fiscal year to 5.1-4.7 per cent from 3.5-3.7 per cent seen previously.

For the first time in more than a year, inflation in October breached the RBI’s 4 per cent medium-term target. This was primarily due to uptick in prices of vegetables such as onion and tomatoes, Das said.

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