India Monetary Policy February 2020

India: Reserve Bank of India leaves rates unchanged in February but still eases monetary policy

The Reserve Bank of India (RBI) decided to leave all monetary policy rates unchanged at its three-day meeting ending on 6 February, as expected by market analysts due to higher-than-expected inflation. As a result, the reverse repo, repo and marginal standing facility rates remain at 4.90%, 5.15% and 5.40%, respectively, where they have been since October when they were last lowered. Nevertheless, the RBI announced measures to support bank lending, by offering banks longer-term liquidity options in addition to existing short-term ones and lowering some of their cash reserve requirements. This led analysts at Nomura to say the RBI conducted an “implicit easing without actually cutting” interest rates.

The RBI’s latest decision was made shortly after the government released its advance economic growth forecasts for the 2019 fiscal year ending this March, which pencils in growth of just 5.0%, significantly down from 6.1% in the previous fiscal year. The RBI also lowered its growth forecast for April–September to a range of 5.5–6.0% from 5.9–6.3%. However, although the RBI now sees weaker-than-projected growth in the near term, it sees a clear uptick further ahead, penciling in a 6.2% expansion for October–December. This is partly because previous interest rate cuts should further feed through to lenders and borrowers; the government announced income taxes cuts in its fiscal year budget starting from April, which should support private consumption; and trade policy uncertainty has diminished, which should benefit exporters. In terms of downside risks to growth, the RBI singled out the outbreak of coronavirus in China.

Although weaker short-term growth prospects would normally nudge the RBI towards another outright rate cut, the Bank was constrained by higher inflation. Inflation jumped to 7.4% in December from 5.5% in November, well above the 4.0% midpoint of the RBI’s target range of 2.0%–6.0%. The acceleration was driven by higher food prices due to adverse weather conditions, and overshot the RBI’s previous projection. Partly because of this, the RBI raised its inflation forecast to 6.5% in January–March, and to a range of 5.0–5.4% in April–September, up from the previous range of 3.8–4.0%.

In sum, although the RBI appeared in a bind at its meeting ending 6 February, it still managed to give the economy a shot in the arm via more unconventional monetary policy tools. Going forward, the Bank said it would “persevere with the accommodative stance as long as necessary to revive growth, while ensuring that inflation remains within the target”. The next monetary policy meeting is set to end on 3 April.

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