India Monetary Policy December 2019

India: Reserve Bank of India unexpectedly holds rates in December

The Reserve Bank of India (RBI)’s Monetary Policy Committee (MPC) unanimously decided to leave all monetary policy rates unchanged at its meeting that ended on 5 December, surprising many market analysts who expected a rate cut. As a result, the repo, marginal standing facility and reverse repurchase rates remained unchanged at 4.90%, 5.15% and 5.40%, respectively. Given the MPC’s next meeting is scheduled for 6 February 2020, this calendar year is set to end with an accumulated reduction in interest rates of 1.35 percentage points.

The MPC argued there was “monetary policy space for further action”; however, it added, “given the evolving growth-inflation dynamics, the MPC felt it appropriate to take a pause at this juncture”. Economic growth slowed to 4.6% in July–September, down from 5.0% in the previous quarter. Moreover, the MPC downgraded its economic growth projections for FY 2019, which runs from April 2019 to March 2020, to 5.0%, down from 6.1% in October. Nevertheless, the MPC was optimistic that the “several measures already initiated by the Government and the monetary easing undertaken by the Reserve Bank since February 2019 [will gradually] further feed into the real economy.” Meanwhile, inflation accelerated to 4.6% in October, up from September’s 4.0% and above the 4.0% midpoint of the Reserve Bank of India’s 2.0%–6.0% target range. The MPC increased its H2 FY 2019 inflation forecast to 4.7%–5.1%, from 3.5%–3.7%.

Looking ahead, the RBI said it would “continue with the accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target”. Analysts at Nomura noted that “the RBI is waiting for more clarity on the uncertainties on growth, inflation, fiscal policy and transmission before deciding its next move”. They added that “higher inflation and potential fiscal slippage of ~0.4% of GDP in the Union Budget (on 1 Feb.) will lead the MPC to extend its pause to the next February meeting (on 6 Feb)”, which “should provide space for a 25bp rate cut in [April–June]”. ING Economist Prakash Sakpal, however, is slightly more hawkish and believes the Bank will cut rates by 25 basis points at the February 2020 meeting.

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