RBI hits pause after five straight rate cuts: Top highlights from MPC meet

The Reserve Bank of India's Monetary Policy Committee (MPC) decided to pause in December, and left the repo rate unchanged at 5.15 per cent while maintaining the stance as 'accommodative' "as long as it is necessary to revive growth, while ensuring that inflation remains within the target".

Consequently, the reverse repo rate thus remained unchanged at 4.90 per cent, and the marginal standing facility (MSF) rate and the bank rate at 5.40 per cent. 

RBI Governor Shaktikanta Das said while there was space for further easing in future, the central bank wanted to let the impact of the previous rate cuts and government measures play out while keeping the inflation within the target. 

"These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth," the RBI said.
 

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

Here are the key takeaways:

Inflation revised upwards

According to RBI, the upsurge in prices of vegetables is likely to continue in immediate months, while  price pressures seen in other food items such as milk, pulses, and sugar are likely to be sustained. Considering this, the RBI revised retail inflation forecast upwards to 5.1-4.7 per cent for H2:2019-20 from 3.5-3.7 per cent. For H1: 2020-21, the central bank revised forecast to 4.0-3.8 per cent, "with risks broadly balanced".

Retail inflation, measured by y-o-y changes in the consumer price index (CPI) inflation, increased sharply to 4.6 per cent in October, propelled by a surge in food prices which spiked to 6.9 per cent in October – a 39 month-high –  due to sharp increase in prices of vegetables due to heavy unseasonal rains. 

FY20 growth forecast slashed further

Given the weak economic activity and the negative output gap, the RBI has revised downwards the real GDP growth for 2019-20 from 6.1 per cent in the October policy to 5 per cent – 4.9-5.5 per cent in H2FY20 and 5.9-6.3 per cent for H1FY21.

RBI said the GDP growth for Q2FY20, which grew 4.5 per cent YoY, was significantly lower-than-projected with domestic and external demand conditions remaining weak. Business sentiment remained pessimistic in Q3FY20 and service sector activity stayed subdued in October. 

However, RBI said, "the business expectations index of the Reserve Bank’s industrial outlook survey indicates a marginal pickup in business sentiments in Q4 while monetary policy easing since February 2019 and the measures initiated by the government are expected to revive sentiment and spur domestic demand. There are some indications that capex cycle may be turning up as companies using corporate tax rate cut to deleverage balance sheets.". However, the RBI raised concern over possible fall in direct tax collections due to economic slowdown. 

Going forward, the RBI said that while 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.

Global growth subdued

According to the central bank, global economic activity since the RBI's October meeting has remained subdued, "though some signs of resilience are becoming visible". Among the advanced economies (AEs), US’ GDP growth picked up in Q3 on strong private investment and personal consumption expenditure. Among emerging market economies, GDP growth in China decelerated further in Q3, reflecting weak industrial production and declining exports amid trade tensions with the US.

About financial markets, the RBI said global markets have been buoyant on hopes of US-China trade deal resolution.

Improved monetary transmission

The RBI said the monetary transmission has been "full and reasonably swift across various money market segments and the private corporate bond market". 

"As against the cumulative reduction in the policy repo rate by 135 bps during February-October 2019, transmission to various money and corporate debt market segments ranged from 137 bps (overnight call money market) to 218 bps (3-month CPs of non-banking finance companies)," it said.

Transmission is expected to improve going forward as the share of base rate loans, interest rates on which have remained sticky, declines; and MCLR-based floating rate loans, which typically have annual resets, become due for renewal. 

Strengthen co-operative banks

The RBI said it would take steps to strengthen depositors' safety with cooperative banks and address cybersecurity concerns. Specifically for urban cooperative banks (UCBs), the central bank would look to amend certain regulatory guidelines.