RBI sees room for rate cuts to arrest further weakening in growth; awaits clarity on inflation, minutes show

  • The Reserve Bank of India unexpectedly left its key repo rate unchanged earlier this month, even as it slashed its forecast for economic growth to its lowest in over a decade

  • The RBI’s monetary policy committee (MPC) unanimously voted to keep the rate at 5.15 percent

  • Retail food prices, which make up nearly half of India’s inflation basket, rose 10.01 percent in November from a year earlier, against 7.89 percent in October

Mumbai: India has room to reduce interest rates further to arrest any further weakening in growth, but rising food prices warranted a pause in December, according to the minutes of the monetary policy committee meeting released on Thursday.

The Reserve Bank of India unexpectedly left its key repo rate unchanged earlier this month, even as it slashed its forecast for economic growth to its lowest in over a decade.

The RBI’s monetary policy committee (MPC) unanimously voted to keep the rate at 5.15 percent.

“While the current spike in the headline inflation is arguably due to the temporary supply shocks on the food front, the impact is not confined only to a few items. It is important to understand how much would be the impact and for how long,” MPC member Ravindra Dholakia said.

Annual retail inflation increased to 5.54 percent last month, faster than the 4.62 percent rate in October and greater than the 5.26 percent forecast in a Reuters poll of analysts.

Retail food prices, which make up nearly half of India’s inflation basket, rose 10.01 percent in November from a year earlier, against 7.89 percent in October.

 RBI sees room for rate cuts to arrest further weakening in growth; awaits clarity on inflation, minutes show

Representational image. Reuters.

“There exists considerable uncertainty on the food price trajectory, and the quantum of impact of unseasonal rains on kharif output would be known only early next year. The incoming data may also provide greater clarity on the growth outlook,” deputy governor Bibhu Prasad Kanungo said.

In the July-September period, India’s growth continued to slide, to a six-year low of 4.5 percent.

The MPC members will wait and watch the effect telecom price increases and sustained high onion prices have on inflation before its next policy decision, in February.

The members also want to see the upcoming federal budget due to be released just days before their next meeting.

“With the pending monetary transmission expected to be realised in the near future, measures are already undertaken by the government to address the growth slowdown expected to play out, and growth initiatives expected to be announced in the upcoming budget, there is merit in a wait-and-watch approach,” MPC member Pami Dua said.

The members also unanimously voted to keep the stance of the monetary policy at accommodative.

“I still maintain that there is space for further rate cuts even now. The question is of the timing and magnitude,” Dholakia.

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Updated Date: Dec 20, 2019 08:06:39 IST