Mumbai: The Reserve Bank of India (RBI) 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% and reverse repo rate at 4.90%.
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% in the September quarter from 7% a year ago.
The RBI reiterated it would maintain an accommodative stance as long as was necessary to revive economic growth but cut its GDP (gross domestic product) growth forecast to 5% for the 2019-20 fiscal year (April to March) from 6% 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.
Inflation Forecast Hikes Over Spike in Veggie Prices
The RBI raised its inflation projection to 5.1-4.7% for the second half of the current fiscal on the back of spike in prices of vegetables such as onion and tomatoes.
The central bank had earlier estimated headline inflation at 3.5-3.7%
for the second half of the ongoing fiscal.
"Going forward, the inflation outlook is likely to be influenced by several factors. First, 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 measures taken by the government to augment supply through imports should help soften vegetables prices by early February 2020," the RBI said in its fifth bi-monthly monetary policy review of the fiscal.
There are incipient price pressures seen in other food items such as milk, pulses, and sugar likely to be sustained, with implications for the trajectory of food inflation, it said.
Retail inflation increased sharply to 4.6% in October, propelled by a surge in food prices.
about drivers of the Consumer Price Index (CPI), it said, food inflation spiked to 6.9% in October – a 39-month high – pushed up by a sharp increase in prices of vegetables due to heavy unseasonal rains.
Prices of onions, in particular, shot up by 45.3% in September and further by 19.6% in October, it said.
Inflation in several other food items such as fruits, milk, pulses and cereals also increased, reflecting diverse factors – the cost push of fodder prices in the case of milk; decline in production and sowing area of pulses; and minimum support price effects. Sugar and confectionery prices moved out of deflation in October as sugarcane output shrank on an annual basis, it said.
However, it said domestic demand has slowed down, which is being reflected in the softening of inflation excluding food and fuel. Crude oil prices are expected to remain range bound, barring any supply disruptions due to geo-political tensions.
"Taking into consideration these factors, the CPI inflation projection is revised upwards to 5.1-4.7% for H2 of 2019-20 and 4.0-3.8% for H1 of 2020-21, with risks broadly balanced," it said.
It is, therefore, prudent to carefully monitor incoming data to gain clarity on the inflation outlook.
"Similarly, the forthcoming union budget will provide better insight into further measures to be undertaken by the Government and their impact on growth," it said.