The Reserve Bank of India (RBI)'s five-member Monetary Policy Committee (MPC) has decided to put a pause on easing of repo rate despite expectations of a 25 basis point cut. But, the MPC offered solace that there was monetary policy space for future action.
There are multiple reasons for the RBI's decision to not change the repo rate:
Food inflation to remain high
The Reserve Bank of India (RBI) expects food inflation to remain high in the next six months. It has also revised the inflation projection from 3.5-3.7 per cent in the second half of 2019-20 to 4.7-5.1 per cent. That clearly shows the RBI expects retail inflation to remain high. The CPI jumped to 4 per cent in September, 70 basis points higher than in August. That came as a big surprise for the RBI, which was expecting a benign inflation outlook.
Telecom tariffs to push up core inflation
The RBI is also worried about core inflation, which is currently stable. The recent tariff hikes by telecom service providers have increased the risk of pushing up core inflation and, consequently, CPI numbers, which the RBI targets.
Awaiting more fiscal measures
The MPC wants to have a greater clarity on the nature of fiscal measures that the government would like to take in the Union Budget 2020-21 in February next year. The next policy is also due in February. Many suggest the RBI would also be keen to see where the fiscal deficit settles because of the lower growth and tax collection. The way nominal GDP is growing, it puts a question mark on targeted tax collections.
More scope for transmission of rates
The MPC also wants to see a greater transmission of the 135 basis points cut in the repo rate to 5.15 per cent since January this year. The banks' weighted average lending rates reduced by only 44 basis points, whereas the MCLR rates went down by 49 basis points only. The transmission of rates is 135 basis points in call rates; 218 basis points in three months commercial paper (CP) rates of NBFCs; and 113 basis points for G-Sec.