This comes contrary to the earlier market expectations which had projected that the Committee might, in fact, end up slashing repo rates yet again.
The Reserve Bank of India (RBI)'s Monetary Policy Committee (MPC) decided to keep the repo rate unchanged at 5.15% after meeting on Thursday to review the financial situation of the country and suggest measures to boost the struggling economy. The reverse repo rate is at 4.90% and the bank rate is at 5.40%. This comes contrary to the earlier market expectations which had projected that the Committee might, in fact, end up slashing repo rates yet again after doing so for five consecutive times in the short-term lending rate in 2019, with an intention to boost equity indices.
The MPC also decided to continue with the accommodative stance as long as it is necessary to revive growth while ensuring that inflation remains within the target. Sources said that not all members of the MPC were in favour of the cuts. The inflation rate higher than expected in October and is expected to be 5.1 - 4.7% in HI FY20. The GDP growth expected to be 5.9-6.3% in FY21. The Urban co-operative banks' lending rules, too, have not been changed. In addition to this, co-operative banks will further strengthen the security of customers. The cybersecurity rules of co-operative banks will be verified by December 31.
However, the MPC has decreased the GDP projection from 6.1% to 5% for 2019-20. RBI Governor Shaktikanta Das said, "As regards the external sector, exports contracted in September-October 2019 reflecting the persisting weakness in global trade but non-oil export growth returned to positive territory in October, after a gap of two months."
The RBI reasoned that global economic activity has remained subdued, not only for developed economies in America, Europe, Japan, etc but also in emerging economies in China, Russia, South Africa, and Brazil. While crude oil prices moved in a narrow range in both directions, gold prices traded sideways before falling in early November. RBI Governor Shaktikanta Das elaborated on the following facts by stating that inflation remained benign in major AEs and EMEs in Q3, except in China where it firmed up to its highest level in eight years.
Investors in the equity market were watching the Committee's decision with a keen eye, as it spells numbers amid concerns over the declining Gross Domestic Product (GDP) growth rate and a slowing economy. "The market is cautiously awaiting RBI monetary policy meeting to be held tomorrow where it expects the central bank to deliver its sixth rate cut of the year despite higher inflation. 25 bps rate cut is already factored in by the market and thus investors would watch out for any surprise on that front and the commentary on the future path," Siddhartha Khemka, head of retail research at Motilal Oswal Financial Services, had said.
Repo rate is the rate at which the RBI lends money to commercial banks. A repo rate cut allows banks to reduce interest rates for consumers and lowers equal monthly instalments on home loans, car loans and personal loans.
Earlier, the RBI Governor, Shaktikanta Das, had hinted that benign inflation provides room for further monetary policy easing while space for fiscal space is limited.
GDP growth of India slipped to 4.5% in the 2nd quarter of FY20. It marked the slowest expansion in 26 quarters. It was mainly on account of weak manufacturing and a drop in exports due to a global slowdown. Expressing concern over the situation, former Prime Minister Manmohan Singh said that the state of our economy is 'deeply worrying'.
Contributing to the slowdown, the output of eight core sectors of the Indian industry – coal, crude oil, natural gas, refinery products, fertiliser, steel, cement, and electricity – declined by 5.8% in October, according to data released by the Ministry of Commerce and Industry on Friday.
The next MPC meeting of the RBI will take place on February 4-6, 2020.
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