RBI keeps rates unchanged amid inflation worries

Mumbai/Kolkata: The Reserve Bank of India (RBI) kept interest rates unchanged on Thursday as expected amid concerns over inflation. Governor Shaktikanta Das also said that monetary policy wasn’t the only tool available for reviving economic growth, while allowing that there is “policy space available for future action.”

The central bank raised its inflation projection, saying that outlook on prices remains uncertain. The Monetary Policy Committee (MPC) maintained the accommodative stance.

“The MPC… 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 release. “These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth.”

The inflation projection for the second half of the fiscal year was raised to 5.4-5.0% from the previous projection of 5.1-4.7%. The RBI is mandated to curb inflation to 4% with a two percentage point margin on either side.

“The MPC recognises that there is policy space available for future action,” RBI said. “The path of inflation is, however, elevated and on a rising trajectory through Q4:2019-20. The outlook for inflation is highly uncertain at this juncture.”

The GDP growth forecast for the next fiscal has been kept at 6 to 6.5% as estimated by the Economic Survey presented last week.

“There is continuity over monetary policy this time and the previous one. But this should not be read as a pointer of future action,” Das said. “MPC is constrained by inflation pressure, but there are other ways of raising growth.”

Retail inflation accelerated to 7.4% in December 2019, the fastest since July 2014. The MPC observed that the economy continues to be weak and the output gap remains negative.

“While some high-frequency indicators have turned around and point to a lift in the momentum of economic activity, there is a need to await incoming data to gauge their sustainability,” the policy document said.

The repo rate, at which the central bank lends to banks, was kept at 5.15%. Consequently, all other rates remain the same. Investors had factored in a pause by the MPC on Thursday after it raised the inflation forecast in the December policy review after the Consumer Price Index (CPI) surged due to rising vegetable prices. Rates had been kept unchanged at that last review as well.

Economists said that the December CPI gain of 7.35% was an exceptional one and that it would slow in the months ahead farm products come to market. The six-member MPC voted unanimously to keep the rates unchanged.

The governor said rate transmission had improved.

“It is necessary to recognise that transmission across various money market segments and the private corporate bond market has been sizable,” Das said. “The external benchmark system has helped banks reduce rates. These developments should amplify the effects of the cumulative policy rate reductions since February 2019 and pull up domestic demand going forward.”

He said the outlook for investment is showing signs of improvement while crude oil prices and growth across the globe have been hit by the coronavirus outbreak in China. Although the commentary has been dovish, there’s worry about food price pressures in the near term.

“It was widely expected that RBI was likely to continue with the pause till there is greater visibility on the inflation front. At this juncture, rate modification is actually not required as the inter-bank 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,” said Joseph Thomas, head of research at Emkay Wealth Management. “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.”

RBI said, “The next meeting of the MPC is scheduled during March 31, April 1 and 3, 2020.”