Rates fall despite RBI's status quo

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Segway-like vehicles were also used by the police to keep an eye on the large crowd on Marina Beach.

The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) decided at a meeting on Thursday to leave interest rates unchanged after a surge in inflation, but stressed that there was room for rate cuts.

This is the second policy review meeting where interest rates remain unchanged. The RBI cut interest rates by 135 basis points between February and October 2019, before hitting the pause button when reviewing the guidelines in December.

Thursday's decision was unanimous among all six MPC members.

RBI Governor Shaktikanta admitted that the market had taken the status quo into account. "Although this decision is on the expected line and may be heavily discounted, it is important not to discount the RBI," he said. "It must be borne in mind that the central bank has several instruments that can be used to meet the challenges that the economy faces in the face of sluggish growth."

The central bank took two measures to further loosen lending rates. On the one hand, a window opened in which the commercial banks could be increased by £ 1 with a 5.15% repo rate. Second, banks have been exempted from complying with the liquidity reserve rate, which is 4% of net demand and short-term debt related to home, automobile and MSME loans, which are extended from January 31 to July 31.

"… It is an effort to ensure better monetary policy transmission," Mr. Das said the goal behind the move.

GDP growth of 6% is forecast for the next financial year, which will be between 5.5 and 6% in the first half of financial year 21 and between 6.2% in the third quarter. The growth forecast for the current financial year was 5%.

Rates fall despite RBI's status quo

The outlook for inflation based on the consumer price index has been revised upwards to 6.5% for the fourth quarter of the current financial year and to 5.4-5.0% for the first half of 2020-21. A share of 3.2% is forecast for the third quarter of the next financial year.

While maintaining interest rates, Mr. Das reminded that there would be room for further easing. “Subject to the aggravation of global risks, I would like to emphasize that there is political scope for future measures. This space needs to be used appropriately and should be set up at the right time to optimize the growth impact, ”he said, adding that the downside risks to global growth have increased with the outbreak of the corona virus.

The markets responded positively to the tone: the yield on ten-year benchmark government bonds fell 6 basis points, closing the day at 6.45%.

Economists said RBI is concerned about the recovery in growth and the next rate cut could take place in April – the next policy review meeting.

In a Nomura report it says: “The RBI has taken a break and sent a clear signal that its tendency to relax remains. We continue to believe that the next political step is still a turning point. We expect the repo rate to drop 25 basis points in the second quarter of 2020, which could happen as early as April. "

Abheek Barua, chief economist at HDFC Bank, said: “We expect the central bank to take the first opportunity to cut interest rates as soon as inflation looks better and headline inflation is closer to RBI's target range. We now see a high probability of an interest rate cut (25 basis points) in the first quarter of fiscal year 21.

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