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RBI pegs GDP down to 5 per cent, no rate cut

THE ASIAN AGE. | FALAKNAAZ SYED
Published : Dec 6, 2019, 3:22 am IST
Updated : Dec 6, 2019, 4:52 am IST

The policy repo rate since February was cut in every policy, cumulatively easing by 1.35 per cent or by 135 basis points to 5.15 per cent.

Shaktikanta Das
 Shaktikanta Das

Mumbai: The Reserve Bank of India on Friday sharply cut the economic growth forecast for FY 2019-20 by a whopping 1.1 per cent, down to five per cent, from the 6.1 per cent projection it had made in its October monetary policy, as it kept lending rates unchanged.

Over the 11 months since February, the RBI has cut its GDP forecast by a whopping 2.4 per cent. In its February policy, the RBI had forecast FY20 GDP at 7.4 per cent, which was revised lower to 7.2 per cent in April. Then in June, the central bank set a seven per cent target for the economy to grow, and then down to  6.9 per cent in August, and 6.1 per cent in the October policy, while slashing the GDP forecast sharply to five per cent in the December policy.

The policy repo rate since February was cut in every policy, cumulatively easing by 1.35 per cent or by 135 basis points to 5.15 per cent. The repo rate is that at which commercial banks borrow from the RBI by selling securities and is currently at a 10-year low.

In its fifth bi-monthly monetary policy, the RBI’s six-member Monetary Policy Committee (MPC) stumped the market as it unanimously voted to keep rates unchanged while continuing with an accommodative

stance. The decision to hold interest rates was triggered by the recent spike in inflation.

The stock and bond markets were expecting the MPC to cut the repo rate by 25 basis points. The MPC, however, acknowledged there is space for monetary policy action in the future. Economists expect CPI inflation to soften in the next 2-3 months, reopening the space for further monetary easing.

The RBI expects Q2 FY20’s (July-September) real GDP growth of 4.5 per cent to mark the trough, with a gradual pickup to 4.9-5.5 per cent in H2 FY20 (lowered from 6.6-7.2 per cent earlier) and 5.9-6.3 per cent in H1 FY21. On the other hand, the Consumer Price Inflation forecast is raised marginally to 5.1-4.7 per cent for H2FY20 (vs 3.5-3.7 per cent in October) and 3.8-4 per cent for H1 FY21.The near-termpressure could persist from food inflation and the recent telecom tariff hike can pose an upside risk to core inflation. The RBI also flagged the need to wait for the Union Budget to study fiscal risks and its implications for growth. On growth, the RBI seemed to suggest the MPC has done enough for now and the focus should instead be on tackling “impediments” to investment and ensuring greater policy transmission.

Speaking to reporters at a press conference, RBI governor Shaktikanta Das said: “There is space further available for monetary policy actions but there is a need to optimise the impact of the interest rate cuts. We should give more time for the banks to pass on the interest rate cuts provided so far. The timing of the next rate cut will also be important.”

“Given the evolving growth-inflation dynamics, the MPC felt it appropriate to take a pause at this juncture. Accordingly, the MPC decided to keep the policy repo rate unchanged and continue with the accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within targets,” Mr Das said.

“The government and the RBI till now were in denial mode calling India the fastest growing economy in the world even as the IMF and global rating agencies cut economic growth projections. The RBI’s sharp cut in growth forecast shows the RBI and the government are now acknowledging that there is a problem that needs to be fixed,” said a senior banker.

“The December MPC decision should be seen as a pause and not the end of the easing cycle,” said Siddhartha Sanyal, chief economist and head of research at Bandhan Bank.

Tags: reserve bank of india, economic growth, shaktikanta das