The Reserve Bank of India (RBI) left its repo rate unchanged at 5.15 percent in the February policy review, on concerns of rising inflation but decided to continue with accommodative stance as it expects prices to abate going forward, leaving room for rate cuts in future.
RBI revised its inflation estimate upwards to 6.5 percent for January-March quarter, 5.4-5.0 percent for first half and 3.2 percent for third quarter of next financial year. It expects GDP growth at 6 percent for 2020-21.
“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 on February 6.
“On the other hand, economic activity remains subdued and the few indicators that have moved up recently are yet to gain traction in a more broad-based manner. Given the evolving growth-inflation dynamics, the MPC felt it appropriate to maintain status quo,” it added.
All six members of the MPC voted in favour of a pause, the RBI said.
RBI said that it expects inflation to remain elevated in the short-run, though first half of next financial year.
“Overall, the inflation outlook remains highly uncertain. Accordingly, the MPC will remain vigilant about the potential generalisation of inflationary pressures as several of the underlying factors cited earlier appear to be operating in concert,” RBI said.
This is the second consecutive pause by the RBI after it reduced policy rates by 135 basis points in five back-to-back reviews last year.
India’s retail inflation soared to a 5-year high of 7.35 percent in December, breaching the Monetary Policy Committee’s (MPC) target for the first time since it was set in August 2016.
As per the RBI Act, MPC’s inflation target is set every five years. The current range of 2-6 percent was fixed for rate setting until March 2021.
If the inflation breaches the tolerance levels for any three consecutive quarters, the RBI will have to report to the government explaining the reasons for failing to achieve the set target with remedial measures.
While a sharp growth slowdown had triggered a slew of measures last year, the Budget for 2020-21 presented by Finance minister Nirmala Sitharaman on February 1 was seen as lacking any more steps to boost growth.
The country’s economy grew at 4.5 percent in the first half of current financial year. It is likely to be around 5 percent for 2019-20.