The Monetary Policy Committee (MPC) unanimously decided to keep the repo rate unchanged at 5.15 percent in its sixth bio-monthly policy meeting while retaining accommodative stance. The central bank consistently cut the repo rate by 135 bps in the last five meetings before this.
"The MPC recognises that there is 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," the RBI said in its note.
Accordingly, the MPC has 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 BSE Sensex was down 86.40 points at 40,763.89 and the Nifty fell 32.50 points to 12,010.70 amid volatility as the market was expecting a repo rate cut by 25bps.
Experts feel pausing after consistent rate cut is not a big deal. They expect more rate cuts in the next policy meetings and next year, and hence the market has not seen much fall in equity market.
"It is a surprise. But, the RBI has already given 135bps repo rate cut, and one policy waiting is not a big deal. We will see another 60-70 bps rate cut in 2020 as inflation will cool off," Kaushik Das, Chief Economist - Deutsche Bank, told CNBC-TV18.
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The CPI inflation in October reached 4.6 percent. Das expects it to be 5.3 percent in November.
"The market was clearly expecting rate cut, but now the market may be latching onto future rate cut, and it generally reacts on the basis of a likely rate cut as the space remains. The RBI clearly said it would look at Budget 2020, inflation trend and then will take a call about how much to cut going forward," Das said.
Jimeet Modi, Founder & CEO - SAMCO Securities & StockNote, has said that the RBI has thrown the ball back to the government’s court to revive the economic engine, which further deteriorated since the last meet.
“The transmission of interest rates have not happened yet, which could be one of the reasons the RBI waited to cut rates and nudged the government and banks to take efforts from their end,” he said.
“Additionally, slightly higher inflationary tendencies might have also led to the pause in the rate cut. But, this is negative for the markets as a rate cut was required to boost risk taking appetite in the economy,” he added.
SS Mallikarjuna Rao, MD and CEO of PNB, and Kamal Mahajan, the head of treasury and global markets at Bank of Baroda, also expect a repo rate cut in the next policy meetings.
"The 135bps repo rate cut transmission has not happened yet. Growth is not there, and credit growth has not yet picked up. We believe MCLR will come down and banks will reduce their spreads. The way GDP numbers are coming, there is way for a rate cut. As inflation is expected to come down next year, there is further room in next two rate cuts," Mahajan said.
"After a very long time, the RBI has truly surprised me," Taimur Baig, MD and Chief Economist at DBS Group Research, said in an interview to CNBC-TV18.
He said expectations for GDP growth below 5 percent had already risen. Hence, the research house expects 4.2-4.3 percent growth in October-December quarter and, as a result full year is likely to be below 5 percent.
More importantly, as expected, the RBI slashed its full-year growth target to 5 percent from 6.1 percent earlier. In last policy meeting also, the central bank reduced the GDP growth forecast to 6.1 percent from 6.9 percent.
"The GDP growth for Q2FY20 (4.5 percent) turned out to be significantly lower than projected. Various high frequency indicators suggest that domestic and external demand conditions have remained weak," it said.
The RBI also further reduced its growth forecast for the second half of FY20 to 4.9-5.5 percent from 6.6-7.2 percent earlier, but it sees 5.9-6.3 percent growth in first half of FY21.
"Based on the early results, the business expectations index of the Reserve Bank's industrial outlook survey indicates a marginal pickup in business sentiments in Q4. On the positive side, however, monetary policy easing since February 2019 and the measures initiated by the Government over the last few months are expected to revive sentiment and spur domestic demand," said the RBI.
The central bank revised its inflation forecast upwards to 5.1-4.7 percent for second half of FY20, from 3.5-3.7 percent earlier, but it feels it may moderate to 4-3.8 percent in first half of 2020.
"The upsurge in prices of vegetables is likely to continue in immediate months; however, a pick-up in arrivals from the late kharif season along with measures taken by the Government to augment supply through imports should help soften vegetables prices by early February 2020," the RBI said.
"In the judgement of the MPC, inflation is rising in the near-term, but it is likely to moderate below target by Q2:2020-21. It is, therefore, prudent to carefully monitor incoming data to gain clarity on the inflation outlook. Similarly, the forthcoming union budget will provide better insight into further measures to be undertaken by the government and their impact on growth," it added.
Here is what other analysts say about RBI policy:
Vinod Nair, Head of Research at Geojit Financial Services
With the slowdown in India getting more severe than expected and RBI cutting real GDP forecast to 5 percent for FY20, we can expect more rate cuts depending on the evolving macro-economic data in the upcoming MPC meetings. We don't expect this decision to completely change the trend of the market rather than consolidation in rate sensitive stocks in the short-term.
Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares & Stock Brokers
RBI's rate pause and the second successive sharp downward revision of GDP estimate for FY20 have been surprising. More than flare in inflation, lack of transmission of rate cut seems to have been the bigger reason for the rate pause. We, however, expect RBI to resume rate cut in January 2020. We also expect FY20 GDP growth to be better than RBI’s revised estimate.
Amar Ambani, Head of Research - Institutional Equities, YES Securities
The pause on the rates is attributed to transient inflationary risks, though the central bank affirms that there is space for policy action.
Given the growth-inflation dynamics, we still sense that RBI will deliver a rate cut of 25bps in February policy meeting given the widespread deceleration in the economy.
Although RBI is concerned about near-term inflation risks, higher Rabi crop output will assuage the spike in food prices. Benign core-inflation will also persuade RBI to remain accommodative.
Deepthi Mary Mathew, Economist at Geojit Financial Services
With the RBI following a inflation targeting regime, the Central Bank focused on maintaining the inflation rate within the target range. The rising food inflation posed a challenge to the Central Bank in cutting the rates.
For instance, in October, food inflation stood at 6.93 percent. In the same month, vegetable prices registered a YoY growth rate of 26 percent. However, by maintaining the accommodative stance, there is room for rate cuts in the future.
Nikhil Gupta, Chief Economist, Motilal Oswal Financial Services
Overall, today's status quo increases the credibility of RBI's inflation mandate. We had always believed that today's cut would be the last rate cut in this cycle. We continue to maintain that there will be no more rate cuts now unless inflation falls back towards 4 percent. It implies that any rate cut is unlikely in the next one year.
Mustafa Nadeeem, CEO, Epic Research
We have already seen quite a few rate cuts in the past and going forward we believe that accommodative stance would be maintained. What we need is credit growth to pick up as we see there have been 135 bps cut in policy repo rate since Feb-19 but the transmission in the credit market is sluggish and partial in G-Sec.
We need to see transmission happening in lending rates across the market. The Union Budget is two months away so we believe we can see certain measures post Budget.
Anusha Raheja, BFSI Research Analyst at LKP Securities
With the surplus liquidity in the system, rates have already come down in market. Status-quo on repo rates is in a way positive for banks as they will not have to bring down their lending rates as per new repo rate linked loan pricing. Going forward, we see limited scope of repo rate reductions considering upward pressure on inflation.