RBI lowers GDP forecast to 5%, keeps interest rates unchanged over inflation fears
The BSE Sensex dropped over 100 points in the afternoon session after the decision on the repo rate.
The Reserve Bank of India on Thursday lowered its projection for the economic growth rate to 5% for 2019-’20 financial year, just two months after it had forecast a 6.1% growth rate. The central bank cited weak domestic and external demand as a reason for the downward projection.
However, the central bank’s Monetary Policy Committee, which met this week, decided to keep key interest rates unchanged, citing the “evolving growth-inflation dynamics”. The repo rate, or the interest rate at which the RBI lends to commercial banks, will remain at 5.15%.
The BSE Sensex dropped over 100 points in the afternoon session after the decision on the repo rate, as analysts had hoped for yet another reduction. The Sensex had opened 84.17 points higher at 40,934.46. By 12.27 pm, it was trading at 40,844 points.
All the six members of the MPC voted in favour of pausing the series of rate cuts that the central bank had started in February. This year, the RBI has already cut the repo rate by 135 basis points to a nine-year low.
The reverse repo rate was kept unchanged at 4.90%. The reverse repo rate is the rate at which the central bank borrows money from commercial banks.
The committee also decided to continue with the “accommodative” stance “as long as it is necessary to revive growth, while ensuring that inflation remains within the target”. The central bank targets a consumer price index-based inflation of 4%, with a tolerance limit of 2% on either side.
The committee said growth had slowed down and inflation was expected to rise in the near term and moderate below the target only by July-September 2020. “It is, therefore, prudent to carefully monitor incoming data to gain clarity on the inflation outlook,” the committee said, explaining the decision to keep rates unchanged. “Similarly, the forthcoming Union Budget will provide better insight into further measures to be undertaken by the Government and their impact on growth.”
The RBI is responsible for framing India’s monetary policy, and sets interest rates to keep inflation in control while pushing for growth. A rate increase is typically expected to curb inflation when prices are on the rise.
This came at a time when India’s economy is faltering. Figures released last week showed that Gross Domestic Product growth slumped to a six-year low in October even as industrial output contracted. In the last few months, core sectors such as automobiles and manufacturing have witnessed a progressive slowdown because of weakened consumer demand and dearth of investments.