Daily wage labourers distribute earnings among themselves while waiting for work on a street in New Delhi on December 5 2019. Picture: AFP/PRAKASH SINGH
Daily wage labourers distribute earnings among themselves while waiting for work on a street in New Delhi on December 5 2019. Picture: AFP/PRAKASH SINGH

Mumbai — The Reserve Bank of India (RBI) kept its key lending rate on hold in a shock decision that spooked markets on Thursday, even as it slashed its growth forecast for the economy to its lowest level in over a decade.

The RBI’s monetary policy committee (MPC) was widely expected to deliver its sixth interest rate cut of the year. Instead, the six-member panel unanimously voted to hold the key repo rate at 5.15% while the reverse repo rate was also held at 4.90%.

“I cannot remember the last time there has been such a resounding surprise as far as the RBI decision is concerned. It defies the expectation of the market and also the body language of the central bank over the past six months,” said Taimur Baig, chief economist at DBS Group Research.

Bond yields spiked and equities fell after the decision.

Many economists and analysts have lately begun to argue that rate cuts alone will do little to revive growth

Explaining its decision, the MPC said it is concerned about inflation in the near term, while acknowledging there is room to cut rates further. “The MPC recognises that there is monetary policy space for future action,” the panel said in a statement. “However, given the evolving growth-inflation dynamics, the MPC felt it appropriate to take a pause at this juncture.”

The RBI lowered its GDP growth forecast for the year ending March 2020 to 5% from 6.1%, which, if proved right, would be the lowest full-year growth rate for the economy since the global financial crisis.

The central bank also raised its headline inflation projection for the second half of the ongoing financial year to between 5.1% and 4.9%, from an earlier forecast of between 3.5% and 3.7%.

India’s economic growth fell to 4.5% in the September period down from 7% a year ago, to post its weakest levels in more than six years, and the economy is growing well below the pace needed to generate enough jobs for the millions of Indians entering the labour market each month.

Bond markets reacted negatively with the benchmark 10-year bond yield spiking sharply to 6.61%, compared to the pre-policy and previous closing level of 6.47%. The partially convertible rupee, however, closed stronger at 71.2850 to the dollar after some initial losses.

Equity markets fell after the decision and were choppy throughout the rest of the session. The broader Nifty share index closed down 0.2%.

“While the incoming macro-data was already making market dynamics unpredictable, now, with surprises on monetary policy, markets will likely stay edgy in the near term,” said Rajni Thakur, an economist at RBL Bank.

Accommodative stance

The RBI reiterated that it would maintain an accommodative stance “as long as is necessary to revive economic growth, while ensuring that inflation remains within the target”.

GDP numbers released on Friday showed government spending helping prop up weak demand, while private investment growth had virtually collapsed, with a crisis in the shadow banking sector causing illiquidity in the economy.

Annual retail inflation rose to 4.62% in November, climbing above the midpoint of the RBI’s target range of 2%-6% for the first time in 15 months.

Many economists and analysts have lately begun to argue that rate cuts alone will do little to revive growth and calls for more direct fiscal stimulus from the government have grown louder in recent weeks.

RBI governor Shaktikanta Das told a news conference after the policy decision that both the bank and the government are committed to reviving growth, but that it is critical that monetary and fiscal policy work in tandem.

“For credit flow we’ve been taking various measures from the RBI end and if more measures are needed we will take them, but demand-side measures will be part of the government’s action plan,” said Das. “What measures the government will take on the demand side, I can’t spell out. It’s the prerogative of the government to decide that.”

A Reuters poll of 70 economists had predicted the RBI would cut its repo rate by 25 basis points (bps) then by another 15bps in the second quarter of 2020, where it would stay at least until 2021.

Said Jimeet Modi, CEO of Samco Securities in Mumbai, “The RBI has finally thrown the ball back into the government’s court to revive the economic engine ... But this is a negative for the markets as a rate cut was required to boost risk-taking appetite in the economy.” 

Reuters

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