Published: Thu, December 05, 2019
Markets | By Otis Pena

Surprise: India's central bank keeps key interest rate unchanged

Surprise: India's central bank keeps key interest rate unchanged

"The decision was mainly a result of inflation rising over the past few months, so it looks like the central bank took more of a cautionary approach", Darren Aw, Asia economist at Capital Economics told Al Jazeera.

India's economic growth slowed to 4.5 percent in the September quarter from 7 percent a year ago and the economy is expanding well below the rate needed to generate enough jobs for the millions of young Indians entering the labour market each month. "Against this backdrop, the MPC judged that there is monetary policy space for further action, but it felt appropriate to take a pause at this juncture" Das said. The reverse repo rate under the LAF was reduced to 4.90 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 5.40 per cent.

The Reserve Bank is likely to cut the repo rate for the sixth time in a row in this fiscal's bi-monthly credit policy statement to support the weak economic growth. "This augurs well for transmission to lending rates, going forward", it added.

The RBI lowered the growth forecast for the financial year 2019-2020 to 5 percent from the earlier estimate of 6.1 percent.

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In the October monetary policy, the RBI had revised the CPI or the retail inflation projections to 3.4 per cent for the second quarter of 2019-20 but retained its projections at 3.5 to 3.7 per cent for the second half of 2019-20.

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, it said.

"The central bank expects that the forthcoming union budget will also provide better insight into further measures to be undertaken by the government and its impact on growth". "The need at this juncture is to address impediments, which are holding back investments", it said.

Das also expressed satisfaction with bankers for passing its rate cuts to borrowers, saying that the monetary transmission has been full and reasonably swift. "The introduction of external benchmarks is expected to strengthen monetary transmission".

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