The Reserve Bank of India (RBI), on December 5, maintained status quo, for the first time this year, on higher inflation expectations even as economic growth is likely to weaken going ahead.
All six members of the Monetary Policy Committee (MPC) voted in favour of the pause, leaving repo rate unchanged at 5.15 percent. The repo rate was lowered by 135 basis points in five back-to-back cuts between February-October 2019.
"Let its (previous cuts) impact play out even more and then we reach a position, we time the next decision in a manner that as and when the rate cut is taken, considering that space is available, the impact should be maximized," RBI Governor Shaktikanta Das said.
"So therefore, timing of the rate cut is important rather than mechanically going on cutting rates on every occasion," he added.
The MPC decided to continue with accommodative stance as there is room available for rate cuts going ahead, but it will also monitor inflation data in coming months to get more clarity on movement in prices.
In October, CPI inflation rose to 4.62 percent, breaching the 4 percent mark for the first time since July 2018. The MPC's medium-term target for CPI inflation is set at 4 (+/- 2) percent.
The uptick was led by surge in food prices, led by vegetables and pulses. In some parts of the country, prices of onions have nearly doubled over the past month. Household inflation expectations also rose, adding
"There is a case for looking through the current food price spike, but it would be prudent to await greater clarity on how the inflation path evolves, given the likelihood that several food prices may stabilise by fourth quarter of 2019-20," Das said.
The outlook on Consumer Price Index (CPI) or retail inflation was revised upwards from 3.5-3.7 percent to 5.1-4.7 percent for second half of current financial year.
On the other hand, GDP growth target for current financial year was revised downwards from 6.1 percent in the October policy to 5 percent.
Data released just days before the MPC meeting showed that GDP growth rate in July-September quarter slipped to six-year low of 4.5 percent on the back of weak consumer demand and slow manufacturing activity.
Das said that the government is expected to announce more measures aimed at labour reforms and ease of doing business to address impediments to growth.
He said that government's fiscal deficit, which hit 102.4 percent of entire financial year's budget estimate in October, is likely to ease in the fourth quarter as revenue inflows pick up.
The central bank also expects stronger monetary transmission under the external benchmarking regime, which was introduced from October 1.
“The weighted average term deposit rate declined by 9 basis points in October as against a decline of just 7 basis points in eight months during February-September. This augurs well for transmission to lending rates, going forward,” RBI said.
The MPC consists of RBI Governor Shaktikanta Das, Deputy Governor Bibhu Prasad Kanungo and Michael Patra as RBI nominees, and Chetan Ghate, Pami Dua and Ravindra Dholakia as external members.
The committee was widely expected to cut rates in the December policy review to support the weakening economic growth.
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