RBI policy: MPC springs a surprise; keeps repo rate unchanged at 5.15%

After three days of deliberation, the Reserve Bank of India's Monetary Policy Committee (MPC) has kept the key policy rates unchanged. The monetary policy panel under Shaktikanta Das has kept the repo rate unchanged at 5.15 per cent. The central bank said it'll continue with its 'accommodative' stance. "Repo rate remains unchanged at 5.15%, reverse repo rate is at 4.90% and bank rate is 5.40%," the RBI said in a statement.

The MPC said there's 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. "Accordingly, the MPC decided to keep the policy repo rate unchanged and continue with the accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target," the RBI said.

The RBI said at this juncture, there's need is to address impediments, which are holding back investments. "The introduction of external benchmarks is expected to strengthen monetary transmission. In this context, there is also a need for greater flexibility in the adjustment in interest rates on small saving schemes," it added.

Contrary to RBI's decision, analysts had expected the apex bank to cut the repo rate by 25 basis amid the declining GDP growth. So far, repo rate has been brought down 160 bps from 6.5 on August 1, 2018.

Also read: MPC meet today: RBI likely to slash repo rate by 25 bps to spur economic growth

On the issue of transmission of rates to customers by banks, the RBI said most banks had linked their lending rates to the policy repo rate of the Reserve Bank. "The median term deposit rate has declined by 47 bps during February-November 2019. The weighted average term deposit rate declined by 9 bps in October as against a decline of just 7 bps in eight months during February-September. This augurs well for transmission to lending rates, going forward," it added.

Considering a steep decline in GDP in Q2 at 4.5 per cent, the RBI cut its FY20 GDP target to 5 per cent from 6.1 per cent earlier. The H2 FY20 GDP growth target has also been lowered to 4.9-5.5 per cent from 6.6 -7.2 per cent. The RBI said the GDP in the first half of the fiscal year was at 5.9-6.3 per cent.

The GDP has been on a downhill slope for the last six quarters, with the latest September quarter ending at a low of 4.5 per cent. The GDP in the June quarter closed at 5.1 per cent.

The RBI also revised the CPI inflation projection upwards to 5.1-4.7 per cent for H2:2019-20 and 4.0-3.8 per cent for H1:2020-21, with risks broadly balanced.  "Food inflation spiked to 6.9 per cent 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 per cent in September and further by 19.6 per cent in October," the RBI said.

All members of the MPC - Chetan Ghate, Pami Dua, Ravindra H Dholakia, Michael Debabrata Patra, Bibhu Prasad Kanungo and Shaktikanta Das - voted in favour of the decision.

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