Contrary to what many had expected, the Reserve Bank of India chose not to lower the repo rates. The latest decision of the RBI comes after five consecutive rate cuts. The repo rate - rate at which RBI lends money to commercial banks - stands unchanged at 5.15%. The real estate industry, which is reeling under the pressure of declining sales, were hopeful that RBI would cut interest rates further are disappointed by the decision of the central banker.
The RBI lowered its GDP growth forecast for the year ending March 2020 to 5% from 6.1%, while raising its headline inflation projection for the second half of the current financial year to between 4.9% to 5.1% from an earlier forecast of 3.5%-3.7%. Largely driven by food and vegetable prices, the current onion prices just adding to that, retail inflation has been showing rising trend since Feb 2019 and touched 4.62% in October 2019. "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.
In hindsight the RBI's decision to not mechanically cut rates is a well-thought unanimous decision to give ample time for transmission of five consecutive rate cuts undertaken since January and get better clarity on the inflation trajectory. In fact the transmission of the past 135 basis points reduction onto loan rates has been wanting and is perhaps a reason as to why the RBI would like to wait for these cuts to trickle down to bank lending rates and to the real sector. In maintaining the accommodative stance, the RBI has certainly left space for future rate cut and it would depend on how quickly banks transmit past rate cuts and improve credit flow to the economy.
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