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Last Updated : Feb 06, 2020 04:33 PM IST | Source: Moneycontrol.com

RBI balances growth and stability; here are the reasons it held rates steady

Even as the concerns over a lingering weakness in the economy persist, rising inflation is the biggest factor that kept the central bank away from tweaking key lending rates.

The Reserve Bank of India (RBI), on February 6, left its repo rate unchanged at 5.15 percent in the last policy review of FY20 on concerns of rising inflation but decided to continue with the accommodative stance as it expects prices to abate going forward, leaving room for rate cuts in future.

“The monetary policy committee (MPC) recognises that there is policy space available for future action. The path of inflation is, however, elevated and on a rising trajectory through Q4:2019-20. The outlook for inflation is highly uncertain at this juncture,” the RBI said.

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In its monetary policy review in December, too, RBI had opted for a status quo, leaving the repo unchanged at 5.15 percent on concerns of rising inflation.

Even as the concerns over a lingering weakness in the economy persist, rising inflation is the biggest factor that kept the central bank away from tweaking key lending rates.

The RBI revised its inflation estimate upwards to 6.5 percent for January-March quarter, 5.4-5.0 percent for the first half and 3.2 percent for the third quarter of next financial year. It expects GDP growth at 6 percent for 2020-21.

In December, the retail inflation peaked to a five-year high of 7.3 percent, mainly on account of costlier vegetables, specifically onion and tomato.

Why did RBI maintain status quo?

Experts point out that the central bank had little legroom for cutting policy rates. They highlight that as the Budget is out now, the RBI has tried to maintain a balance in growth and financial stability.

"The Reserve Bank of India has kept a delicate balance between inflation management and revival of growth, with the continuation of key policy rates and accommodative stance, all in line with BWR expectations. This balancing act is at the back of inflation crossing the tolerance band particularly on account of vegetable prices, higher than budgeted fiscal deficit and subdued global activity," said Balkrishna Piparaiya, Senior Ratings-Director, Brickwork Ratings.

Also Read: RBI Monetary Policy: FY21 GDP growth projected at 6%

Joseph Thomas, Head of Research - Emkay Wealth Management, too, has a view on similar lines.

"The Budget is out, and there is a lot of clarity about the government finances, the RBI has crafted a fine balancing act of reconciling the requirements of growth with stability," said Thomas.

Thomas said it was widely expected that the RBI was to continue with the pause till there is greater visibility on the inflation front.

"At this juncture, rate modification is not required as the inter-bank market has a huge surplus of close Rs 3 lakh crore to support the liquidity requirements of the system, and this alone will ensure that the short-term rates do not move up. The status quo comes as a relief to the short end of the curve, but the pressures at the long end may persist for a longer time," Thomas said.

The Budget introduced several measures to provide an impetus to growth, which also gave RBI an opportunity to focus more on inflation and stability of the currency as the outlook for inflation is highly uncertain at this juncture.

Deepthi Mary Mathew, Economist at Geojit Financial Services, said: "It was an expected move by the RBI, maintaining the repo rate unchanged at 5.15 percent. With the inflation rate breaching the upper band, it will take time for the central bank to revive the rate cuts. By maintaining the accommodative stance, there is scope for rate cuts once the inflation rate falls back to a comfortable level."

In its policy meet, the RBI acknowledged that the pace of global economic activity has remained slow paced. However, at the domestic level, several high-frequency indicators of services have turned upwards. Industrial activity, measured by the index of industrial production (IIP), improved in November.

Also Read: RBI Monetary Policy key takeaways

The RBI underscored that the monetary transmission across various money market segments and the private corporate bond market has been sizable.

The MPC seemed to be clear on its agenda. It wanted to strike a balance between growth and stability and they did so by giving relief to MSMEs and the realty sector and maintaining the status quo on the policy rates.

The benefit of CRR to banks for the auto, home and MSME loans is a big positive for the overall market as liquidity was the main concern for economic growth.

"There is a big booster for the real estate sector in terms of extension of date of commencement of commercial operations of project loans for commercial real estate, delayed for reasons beyond the control of promoters, by another one year without downgrading the asset classification. So, we can say that this monetary policy is an extension of the Budget to boost economic growth," said Amit Gupta, Co-Founder & CEO, TradingBells.

The RBI permitted date extension to begin operations of project loans for commercial realty. The extension by another year is without downgrading asset classification.

Also Read RBI Monetary Policy: Shaktikanta Das & Co caught between a rock and a hard place

The central bank said it is actively engaged in revitalising the flow of bank credit to productive sectors having multiplier effects to support impulses of growth.

"It has been decided to permit extension of date of commencement of commercial operations (DCCO) of project loans for commercial real estate, delayed for reasons beyond the control of promoters, by another one year without downgrading the asset classification, in line with treatment accorded to other project loans for non-infrastructure sector," it said.

Keki Mistry, Vice Chairman and CEO-HDFC, while talking to CNBC-TV18, welcomed the move and said the steps taken by RBI will boost GDP growth.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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First Published on Feb 6, 2020 01:15 pm
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