RBI Keeps Repo Rate Unchanged At 5.15%, Projects FY21 GDP At 6%
The RBI projected gross domestic product (GDP) growth for 2020-21 at 6 per cent -- in the range of 5.5 to 6 per cent in H1 and 6.2 per cent in Q3.
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The Reserve Bank of India (RBI) on Thursday decided to keep its short-term lending rate unchanged at 5.15 per cent in the sixth bi-monthly policy review of current financial year 2019-20 but said that there is policy space available for future action.
Consequently, the reverse repo rate stands unchanged at 4.9 per cent. At the same time, the central bank maintained an accommodative stance to support growth. The RBI's six-member monetary policy committee (MPC) voted six-zero in favour of the status quo of interest rates.
Retail inflation measured by year-on-year changes in the consumer price index (CPI) surged from 4.6 per cent in October to 5.5 per cent in November and further to 7.4 per cent in December 2019, the highest reading since July 2014.
"The MPC notes that inflation has surged above the upper tolerance band around the target in December 2019, primarily on the back of the unusual spike in onion prices," said RBI Governor Shaktikanta Das.
A combination of factors may keep headline inflation elevated in the short-run, at least through the first half of next financial year (H1 FY2020-21).
"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 appear to be operating in concert," said Das.
The decisions are in consonance with the objective of achieving the medium-term target for CPI inflation of 4 per cent within a band of plus or minus 2 per cent while supporting growth, he added.
Significantly, the RBI projected gross domestic product (GDP) growth for 2020-21 at 6 per cent -- in the range of 5.5 to 6 per cent in H1 and 6.2 per cent in Q3.
Economic growth has slowed mainly due to weak household spending, muted corporate investments, and a crippling slowdown in manufacturing and construction activity.
The MPC said that the economy continues to be weak and the output gap remains negative. While some high-frequency indicators have turned around and point to a lift in the momentum of economic activity, there is a need to await incoming data to gauge their sustainability.
"Given the evolving growth-inflation dynamics, the MPC felt it appropriate to maintain status quo.
Accordingly, the MPC decided to keep the policy repo rate unchanged and persevere with the accommodative stance as long as necessary to revive growth, while ensuring that inflation remains within the target."
All members of the MPC -- Chetan Ghate, Pami Dua, Ravindra H Dholakia, Michael Debabrata Patra, Bibhu Prasad Kanungo and Shaktikanta Das -- voted to keep the policy repo rate unchanged and continue with the accommodative stance.
In recent weeks, the government has cut corporate tax rates, tweaked foreign direct investment norms and unveiled a mega-merger plan to amalgamate 10 public sector banks into four formidable entities in a bid to kickstart the investment cycle and help India emerge as a five trillion economy over the next five years.
Even globally, central banks have been easing interest rates to combat sluggish growth.
The RBI has slashed interest rates by a cumulative 135 basis points this year to 5.15 per cent, making it the world's most aggressively easing major central bank.