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Highlights: Rising inflation forces RBI to pause despite slowing economic growth

Highlights: Rising inflation forces RBI to pause despite slowing economic growth

Highlights: Rising inflation forces RBI to pause despite slowing economic growth
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The Reserve Bank of India has decided to keep the key lending rates unchanged in a surprise move on Thursday despite slowing economic growth. The RBI’s six-member monetary policy committee has unanimously voted to hold the repo rate at 5.15 percent, with an “accommodative” stance. RBI said, "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 central bank, however, reiterated that the stance would remain accommodative as long as it is necessary to revive the economy. Here are the key highlights from the RBI’s fifth bi-monthly monetary policy meeting:

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Latha Venkatesh explains: How RBI policy decision impacts you##Latha Venkatesh explains: How RBI policy decision impacts you

Dec 5, 2019 2:31 PM

Key highlights from the RBI Monetary Policy statement##Key highlights from the RBI Monetary Policy statement

> The RBI’s Monetary Policy Committee kept the repo rate unchanged at 5.15 perecnt. Consequently, the reverse repo rate held at 4.90 percent. The marginal standing facility rate and the bank rate at 5.40 percent.

> 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.

> All five members of the MPC have voted in favour of holding rates.

> The RBI lowered the growth forecast for the financial year 2019-2020 to 5 percent from the earlier estimate of 6.1 percent. 4.9-5.5 percent in H2FY20 and 5.9-6.3 percent for H1FY21.

> The central bank raised upwards its inflation forecast for the second half of FY20 to 5.1-4.7 percent from 3.5-3.7 percent.

> 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.

> Improved monetary transmission and a quick resolution of global trade tensions are possible upsides to growth projections. A delay in revival of domestic demand, a further slowdown in global economic activity and geo-political tensions are downside risks.

> 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 government measures should help soften vegetables prices by early February 2020.

> The minutes of the MPC’s meeting will be published by December 19, 2019.

> The next meeting of the MPC is scheduled during February 4-6, 2020.

Dec 5, 2019 2:25 PM

R Sivakumar, HD-Fixed Income, Axis Mutual Fund##R Sivakumar, HD-Fixed Income, Axis Mutual Fund

"It is quite interesting of course that the RBI points to weak growth and then doesn’t do anything in terms of rates. But usually, in a weak growth environment, we should have seen flattening of the yield curve that is something we have not seen in the last few months primarily on account of the worries about the fiscal and the public sector borrowing. I don’t think those worries are going away and I think there is, of course, concerns that you might see some slippage in the fiscal this year and potentially in the medium term. So the budget becomes very important that perspective."

Dec 5, 2019 2:16 PM
Highlights: Rising inflation forces RBI to pause despite slowing economic growth
Dec 5, 2019 1:57 PM

Sakshi Gupta, Assistant Vice-President, HDFC Bank##Sakshi Gupta, Assistant Vice-President, HDFC Bank

"The RBI's decision was a surprise, especially the fact that it was a unanimous decision. In the growth-inflation trade-off, the RBI has clearly leaned towards the latter."

"We do not think that the recent inflation spikes are permanent and as food prices stabilise, headline inflation is likely to cool off by the beginning of next fiscal year. More importantly, core inflation momentum continues to remain weak."

"Given the outlook on inflation and as RBI stance remains accommodative, we do not think this is the last cut in the current cycle but probably a brief pause. Growth momentum is likely to improve gradually, and therefore, it is likely to warrant further rate cuts."

Dec 5, 2019 1:32 PM

Sudhakar Shanbhag, chief investment officer, Kotak Mahindra Life Insurance##Sudhakar Shanbhag, chief investment officer, Kotak Mahindra Life Insurance

“Against an almost consensus market expectation of a rate cut based on the slowdown seen in growth, the MPC seems to have chosen to focus on its mandate of inflation management and have recognised that the latest CPI print and expected prints over next few months would be higher than their targeted level and also a belief that past rate cuts will help to support growth with focus on transmission.”

Dec 5, 2019 1:17 PM

RBI regularly monitors top 50 NBFCs##RBI regularly monitors top 50 NBFCs

Highlights: Rising inflation forces RBI to pause despite slowing economic growth
Dec 5, 2019 12:51 PM

Kunal Kundu, India Economist, Societe Generale##Kunal Kundu, India Economist, Societe Generale

"Surprising us and the market, the RBI decided to keep the policy rate unchanged at 5.15%."

"It seems that the RBI was more influenced by the optic of food price driven higher headline inflation even as they revised down their FY20 growth expectation to 5% yoy (close to our expectation of 5.1%) from their earlier expectation of 6.1%."

"While the decision to pause is not entirely unjustified, given the clear lack of efficacy of monetary policy actions through the policy rate cut channel, what was worrying is that the RBI did not announce any unconventional measure but hoped for better transmission of its past actions despite the fact the weighted average cost of lending of scheduled commercial banks between December 2018 and October 2019 actually increased by 5 bps against a policy rate cut to the tune of 135 bps."

Dec 5, 2019 12:37 PM

Nifty Bank slips over 0.5% after RBI keeps rates unchanged##Nifty Bank slips over 0.5% after RBI keeps rates unchanged

Highlights: Rising inflation forces RBI to pause despite slowing economic growth
Dec 5, 2019 12:25 PM

Shaktikanta Das: "Several positive developments which could turn out to be green shoots"##Shaktikanta Das: "Several positive developments which could turn out to be green shoots"

The real GDP growth moderated to 4.5 percent YoY in Q2 ‘19-20. Extending the deceleration to the sixth consecutive quarter.

The slowdown in GDP growth was cushioned by a jump in government final consumption expenditure.

On the supply side gross value added (GVA) growth decelerated to 4.3 percent in Q2 ’19-20, pulled down by contraction in manufacturing.

Growth in the services sector moderated but agricultural GVA growth increased marginally.

Beyond Q2 there are several positive developments which could turn out to be green shoots depending on how they evolve.

Dec 5, 2019 12:23 PM

Kaushik Das, Chief Economist, Deutsche Bank##Kaushik Das, Chief Economist, Deutsche Bank

“We have a terminal repo rate of 4.5. We do not see any reason to change that. This is a temporary pause because inflation has gone up close to 4.6 in October, it might go up to 5.3 in November but RBI has already given 135 bps and back to back 5 policies. I think there would be more rate cuts coming in 2020, about 50-60 bps from here as inflation starts coming down towards 4 percent by April-June.”

Dec 5, 2019 12:09 PM

BSE Sensex edged lower after RBi hold rates##BSE Sensex edged lower after RBi hold rates

Highlights: Rising inflation forces RBI to pause despite slowing economic growth
Dec 5, 2019 12:08 PM

NSE's Nifty50 trade marginally lower after RBI decision##NSE's Nifty50 trade marginally lower after RBI decision

Highlights: Rising inflation forces RBI to pause despite slowing economic growth
Dec 5, 2019 12:05 PM

Taimur Baig, managing director and chief economist, DBS Group Research##Taimur Baig, managing director and chief economist, DBS Group Research

“I cannot remember the last time there have been such a resounding surprise as far as the RBI decision is concerned. It defies the expectation of the market and also the body language of the RBI over the last six months or so when they seem amenable towards out of the box thinking and being very proactive in terms of putting growth. So I will restrict my comment to saying that, yes, after a very long time RBI has truly surprised me.”

Dec 5, 2019 12:02 PM