RBI Keeps Repo Rate Unchanged In Surprise Move, Sharply Lowers GDP Forecast: 10 Points

The status quo on key lending rates by the RBI comes at a time when the economy is struggling against a more than six-year low GDP expansion rate.

Governor Shaktikanta Das said the RBI cannot "mechanically" keep cutting interest rates every time

Highlights

  • RBI maintains status quo on key lending rate, policy stance
  • It trims GDP growth forecast for current fiscal year to 5% from 6.1%
  • RBI is already the most aggressive central bank in Asia
The Reserve Bank of India (RBI) kept its key lending rate unchanged in a shock decision on Thursday and sharply revised its forecast for the economy to project the weakest growth in seven years. The RBI's monetary policy committee led by its Governor Shaktikanta Das voted to hold the repo rate at 5.15 per cent. The central bank lowered its GDP growth forecast to 5 per cent from 6.1 per cent, while maintaining an "accommodative" policy stance. Economists had widely expected the RBI to deliver its sixth interest rate cut of the year at a time India is struggling against a more than six-year low GDP expansion rate and thousands of job losses amid a slowdown across sectors.

Here are 10 things to know about the RBI's decision:

  1. All six members of the Monetary Policy Committee voted to maintain the repo rate at the existing level and hold the reverse repo rate at 4.90 per cent. The repo rate is the key interest rate at which the RBI lends short-term funds to commercial banks.

  2. Explaining its decision, the monetary policy committee said it was concerned about inflation in the near term, while acknowledging that there is room to cut rates further.

  3. The Reserve Bank of India is already the most aggressive central bank in Asia. It has so far this year reduced the key lending rate by a total 135 basis points (1.35 percentage point) in five consecutive bi-monthly reviews till October.

  4. The status quo on repo rate came as a surprise to many economists. A poll of 70 economists by news agency Reuters had predicted that RBI would cut the repo rate by 25 basis points to 4.9 per cent.

  5. However, some had also highlighted limited room for policy easing, considering rising consumer inflation which breached the RBI's medium-term target of 4 per cent after a gap of 15 months.

  6. Speaking to reporters after the release of policy statement, Governor Shaktikanta Das said the RBI will monitor how inflation pans out before taking further policy action. "The timing of rate cuts is very important in order to optimize its impact," he added. The RBI cannot "mechanically" keep cutting interest rates every time, he added.

  7. Lowering its overall economic growth forecast, the central bank said the GDP expansion is expected to be in the range of 4.9-5.5 per cent in the second half of 2019-20, and 5.9-6.3 per cent in the first half of next financial year.

  8. Several measures taken by the government and easing of monetary policy by the RBI since February are gradually expected to feed into the real economy, the central bank said. Among the measures to revive growth are withdrawal of higher taxes on foreign investors, reduction in corporate taxes and a mega merger of state-run banks.

  9. However, some surveys still show business confidence is at multi-year lows as the economy is expanding well below the rate needed to generate enough jobs for the millions of young Indians entering the labour market each month.

  10. The RBI raised its consumer inflation forecasts, to 5.1-4.7 per cent in the second half of 2019-20, and 4.0-3.8 per cent in the first half of 2020-21.

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