{"id":161173,"date":"2019-12-05T09:22:28","date_gmt":"2019-12-05T14:22:28","guid":{"rendered":"https:\/\/www.countingpips.com\/?p=161173"},"modified":"2019-12-05T08:58:42","modified_gmt":"2019-12-05T13:58:42","slug":"india-surprises-by-holding-rate-but-ready-to-cut-if-needed","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2019\/12\/india-surprises-by-holding-rate-but-ready-to-cut-if-needed\/","title":{"rendered":"India surprises by holding rate but ready to cut if needed"},"content":{"rendered":"
December 5, 2019<\/div>
\r\n<\/div><\/div>

By CentralBankNews.info<\/u><\/a><\/p>\n

\u00a0 \u00a0\u00a0 India’s central bank left its policy repo rate steady at 5.15 percent, surprising financial markets that had expected another rate cut to boost a slowing economy, but said it was still ready to cut if needed and would “continue with an accommodative monetary policy stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target.”<\/span><\/p>\n

\u00a0 \u00a0\u00a0 The Reserve Bank of India (RBI), which has cut its key rate five times this year by a total of 135 basis points, said its monetary policy committee felt it was appropriate to pause at this point as past easing and government measures are\u00a0expected to boost growth while inflation is expected to ease.<\/span><\/p>\n

\u00a0 \u00a0\u00a0 RBI’s decision underscores the pause many central banks are now taking following a flurry of rate cuts this year that is expected to revive global growth that has slowed due to a fall in global trade and investments from the uncertainty unleashed by the trade conflict between the U.S. and China.<\/span><\/p>\n

\u00a0 \u00a0 \u00a0RBI was one of the first major central banks to kick off this year’s global easing cycle when it cut its rate in February, a point made by RBI Governor\u00a0Shaktikanta Das who said the central bank had been pre-emptive in easing and rate cuts followed in quick succession in every meeting on monetary\u00a0policy since then, and it was still ready to cut further if needed.<\/span><\/span><\/div>\n
<\/div>\n
\u00a0 \u00a0 \u00a0 “The forward guidance in itself indicates that there is space available for\u00a0further monetary policy action,” Das said, adding there was a “need to\u00a0optimize the impact of rate reductions” and\u00a0the key consideration is the timing of further actions as the impact of past rate cuts is\u00a0monitored.<\/span><\/span><\/div>\n
<\/div>\n
\u00a0 \u00a0 \u00a0 “It is in this context that the MPC decided to pause for now and evaluate the developments with a readiness to act, if the unfolding situation so warrants,” Das said, adding government measures and past\u00a0easing by RBI were “gradually expected to further feed into the real economy.”<\/span><\/span><\/div>\n
<\/div>\n
\u00a0 \u00a0 \u00a0 The\u00a0impact of RBI’s rate cuts to the\u00a0economy\u00a0has also been\u00a0<\/span><\/span>strengthened following a\u00a0decision in September that makes it mandatory for banks to link certain loans to an external benchmark\u00a0system with most banks now linking their lending rates to the central bank’s policy rate.<\/span><\/div>\n
<\/div>\n
\u00a0 \u00a0 \u00a0 The transmission of the RBI’s cumulative 135 basis\u00a0point reduction in the policy rate this year to various\u00a0monetary and corporate debt market\u00a0segments has ranged from 137 basis\u00a0points in the overnight call money market to 218 points for 3-month commercial paper for non-banking finance firms, RBI said.<\/span><\/div>\n
<\/div>\n
\u00a0 \u00a0 \u00a0“Monetary transmission has been full and\u00a0reasonably swift across various money market segments and the private corporate bond market,” Das said, adding this augurs well for the transmission to lending rates, going forward.<\/span><\/div>\n
<\/div>\n
\u00a0 \u00a0RBI’s most\u00a0recent rate cut\u00a0came in October when it also said it\u00a0would continue with an accommodative monetary\u00a0policy stance as long as necessary to revive growth.<\/span><\/div>\n
<\/div>\n
\u00a0 \u00a0 \u00a0 Since then data showed India’s\u00a0gross\u00a0domestic product growth slowed to 4.5 percent in the third quarter from 5.0\u00a0percent in the second quarter, the fifth consecutive\u00a0quarter of slowing growth and the first time since growth fell below 5 percent since 2013.<\/span><\/div>\n
<\/div>\n
\u00a0 \u00a0 \u00a0 RBI once again lowered its growth forecast for the current\u00a0financial year, which began on April 1, to 5.0 percent from October’s\u00a0forecast of 6.1 percent. Growth in 2018-19 was 6.8 percent.<\/span><\/div>\n
<\/div>\n
\u00a0 \u00a0 \u00a0 The slowdown has raised the pressure on India’s prime minister, Narendra Modi who was\u00a0elected to a second term in May, to take further steps to boost growth.\u00a0<\/span><\/div>\n
<\/div>\n
\u00a0 \u00a0 \u00a0 The government has said it will unveil a series of infrastructure projects as part of a plan to invest 100\u00a0trillion rupees and has already cut corporate taxes and sped up\u00a0privatization of state-run firms.<\/span><\/div>\n
<\/div>\n
\u00a0 \u00a0 India’s\u00a0inflation rate has been accelerating in the last two months – it rose to 4.62 percent in\u00a0October from 3.99 percent in September – due to a surge in food prices. Food inflation spiked to 6.9 percent in\u00a0October, a 39-month high, pushed up by a sharp rise in the cost of vegetables due to heavy unseasonal rains.<\/span><\/div>\n
<\/div>\n
\u00a0 \u00a0This has also pushed up inflation\u00a0expectations,\u00a0with the central bank’s\u00a0November survey of households\u00a0showing a rise of 120 basis points over a 3 month period and 180 points over a one-year\u00a0horizon “as they adapted to the spike in food prices in recent months,” RBI said.<\/span><\/div>\n
<\/div>\n
\u00a0 \u00a0 RBI’s forecast for inflation in the second half of 2019-20 was raised to 5.1-4.7 percent from October’s forecast of 3.5-3.7 percent, and to 4.0-3.8\u00a0percent for the first half of 2020-21, with risks broadly balanced.<\/span><\/div>\n
<\/div>\n
\u00a0 \u00a0 \u00a0Further ahead, RBI expects\u00a0inflation to moderate below its midpoint target of 4.0 percent by the second quarter of 2020-21, with the forthcoming government budget also providing better insight into the\u00a0impact of any measures on growth and\u00a0inflation.<\/span><\/div>\n
\u00a0 \u00a0 \u00a0 India’s rupee has been relatively stable this year after falling sharply in 2018 and rose 0.4 percent in response to RBI’s policy decision to trade at 71.2 to the U.S. dollar but is still down 1.8 percent since the start of this year.<\/span><\/div>\n

<\/a><\/p>\n

\u00a0<\/span><\/div>\n
\u00a0\u00a0<\/span><\/div>\n

\u00a0The Reserve Bank of India released the fifth bi-monthly monetary policy statement followed by a statement\u00a0Governor Shri Shaktikanta Das:<\/span><\/span>
\n
\n<\/span><\/p>\n

“On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today (December 5, 2019) decided to:<\/div>\n