RBI unexpectedly pauses interest rate on inflation concern, cuts GDP growth forecast

The Reserve Bank on Thursday unexpectedly kept benchmark interest rates unchanged on concerns of headline inflation breaching its medium-term target, despite a worrying slowdown in the economy.

After five consecutive cuts in interest rates this year, the six-member monetary policy committee (MPC) headed by RBI Governor Shaktikanta Das unanimously voted to hold the key repo rate at 5.15 per cent and reverse repo rate at 4.90 per cent.

Bankers and economists had widely expected the central bank to cut rates for a sixth time to support a slowing economy, whose growth rate slipped further to a six-year low of 4.5 per cent in the September quarter from 7 per cent a year back.

The RBI reiterated it would maintain an accommodative stance as long as it is necessary to revive economic growth but cut its GDP growth forecast to 5 per cent for the 2019-20 fiscal year (April to March) from 6 per cent earlier estimate.

"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 committee said in a statement.

Das said this was a "temporary pause" in the interest rate cutting cycle and the MPC will be better placed to decide on it in February after more data comes in and the government brings out its Budget for 2020-21.

"Let the impact of 135 basis point cut play out more," he said adding timing was important rather than mechanically cutting rates.

In the five reductions this year, the RBI has cut key interest rate by a total of 135 basis points.

"The need at this juncture is to address impediments, which are holding back investments," the RBI said.

Stating that headline inflation at 4.6 per cent in October was "much higher than expected," the central bank raised upwards its inflation forecast for the second half of the fiscal year to 5.1-4.7 per cent from 3.5-3.7 per cent seen previously.

Inflation in October for the first time in more than a year breached the RBI's 4 per cent medium-term target. This primarily was due to uptick in prices of vegetables such as onion and tomatoes, Das said.