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RBI keeps repo rate unchanged at 5.15%; cuts GDP growth forecast
Dec-05-2019

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC), in its fifth bi-monthly monetary policy review of 2019-20, has kept policy repo rate under the liquidity adjustment facility (LAF) unchanged at 5.15%. This came after five consecutive cuts. Consequently, the reverse repo rate under the LAF remains unchanged at 4.90%, and the marginal standing facility (MSF) rate and the Bank Rate at 5.40%. It has kept key rate unchanged in line with its objective of achieving its medium-term inflation target of 4%, with an upper and lower limit of 6% and 2%, respectively, while supporting growth. The MPC also decided to continue with the accommodative stance as long as it is necessary to revive growth. The MPC has recognized 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.

On the inflation front, the CPI inflation projection is revised upwards to 5.1-4.7% for H2:2019-20 and 4.0-3.8% for H1:2020-21, with risks broadly balanced. The MPC noted that the upsurge in prices of vegetables is likely to continue in immediate months. Also, incipient price pressures seen in other food items such as milk, pulses, and sugar are likely to be sustained, with implications for the trajectory of food inflation. It added that both the 3-month and 1-year ahead inflation expectations of households polled by the RBI have risen and these latent sentiment upsides are being reflected in other surveys as well. Moreover, domestic financial markets have exhibited volatility and domestic demand has slowed down, which is being reflected in the softening of inflation excluding food and fuel.

With weak domestic and external demand conditions, the central bank has revised its real Gross Domestic Product (GDP) growth forecast downwards to 5.0% for 2019-20 (FY20) from 6.1% projected in its October policy. It also said growth is likely to be 4.9-5.5% in H2 and 5.9-6.3% for H1:2020-21. The RBI stated that while improved monetary transmission and a quick resolution of global trade tensions are possible upsides to growth projections, a delay in revival of domestic demand, a further slowdown in global economic activity and geo-political tensions are downside risks. The MPC noted that economic activity has weakened further and the output gap remains negative. However, several measures already initiated by the Government and the monetary easing undertaken by the RBI since February 2019 are gradually expected to further feed into the real economy.

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