RBI keeps interest rates unchanged on uncertain inflation outlook

The Reserve Bank on Thursday expectedly left interest rates unchanged amid uncertain inflation outlook but left the door open for more easing in future even as it took steps to spur credit growth in an economy facing its worst slowdown in more than a decade. With all six members of the RBI Governor Shaktikanta Das-led Monetary Policy Committee voting unanimously, the repurchase or repo rate was maintained at 5.15 per cent while retaining its accommodative stance.

With food prices driving retail inflation to a more than five-year high of 7.35 per cent in December, the central bank raised its inflation projection for the six months to September to 5-5.4 per cent from 3.8-4 per cent previously while terming the outlook on price rise as "highly uncertain". The RBI cut its policy rate by 135 basis points over five straight meetings last year, before hitting the pause button in December on inflationary concerns.

The RBI stuck to its prediction of 5 per cent GDP growth in the current fiscal - the lowest in 11 years but lowered its growth forecast for the first half of the coming financial year to 5.5-6 per cent from its December projection of 5.9-6.3 per cent. For the full 2020-21 fiscal, it put the GDP growth at 6 per cent, which is at the lower end of the 6-6.5 per cent expansion projected by the government's Economic Survey. To boost credit growth, it scrapped the mandatory requirement for banks to set aside cash of 4 per cent for every new loan extended to retail automobiles, residential housing, and small businesses till July 2020.

Also, in a major relief to the real estate sector, the RBI extended the restructuring of project loans by a year. Loans for projects that have been delayed for reasons beyond the control of their promoters have been extended by another one year without downgrading the asset classification. This aligns with the treatment accorded to other project loans for the non-infrastructure sector. The move will bring much-needed relief to the cash-starved real estate sector.

At a news conference, Das said while the pause decision may be on expected lines, the RBI has several instruments up its sleeves, hinting at the use of unconventional tools such as the ones used by the US after the global financial crisis in 2008 to boost growth as rate cuts were not effective enough.

"It has to be kept in mind that the central bank has several instruments at its command that it can deploy to address the challenges the Indian economy faces in terms of sluggishness in growth momentum," he said.

The MPC said that while easing global trade tensions should encourage exports and spur new investment, the outbreak of the new coronavirus may impact tourist arrivals and global trade.

"Downside risks to global growth have increased in the context of the outbreak of coronavirus, the full effects of which are still uncertain and unfolding,” Das said.

The MPC said economic activity remains subdued and the few indicators that have moved up recently are yet to gain traction in a more broad-based manner. "Given the evolving growth-inflation dynamics, the MPC felt it appropriate to maintain status quo." On the announcements made by Finance Minister Nirmala Sitharaman in her budget last week, the MPC said, "the rationalisation of personal income tax rates in the Union Budget 2020-21, should support domestic demand along with measures to boost rural and infrastructure spending."

It said though there has been a 0.50 per cent fiscal slippage in FY20, that has not increased the market borrowings, and also noted that the government has budgeted for a Rs 70,000 crore increase in the gross borrowings in FY2021 when it has managed to crimp the fiscal gap to 3.5 per cent. However, in the current year, the government will miss the fiscal deficit target of 3.3 per cent as it witnessed shortfall in tax revenue due to economic slowdown and a cut in the corporate tax rate.

"The Union Budget 2020-21 has introduced several measures to provide an impetus to growth. While the emphasis on boosting the rural economy and infrastructure should help the growth momentum in the near-term, the corporate tax rate cuts of September 2019 should help boost the growth potential over the medium-term," the MPC said.

There is a need for "adjustment" in interest rates on small saving schemes, the MPC said, adding that the external benchmark system adopted from October 1, has strengthened monetary policy transmission. The government is likely to revise small savings rates downward in the coming quarter beginning in April. Commenting on the policy, Rumki Majumdar, Economist, Deloitte India said: "The RBI decided not to cut rates and to be in a wait-and-watch mode in the February policy meeting while continuing on with an 'accommodative' stance. This is because inflationary nor demand pressures for goods other than food in the near future may remain low owing to weak demand and excess capacity issues."

The expansionary monetary policy stance was necessary and is an assurance that there will be no reversal of easing and that the RBI will not hike rates immediately, she said, adding the current slowdown in the economy is driven by liquidity issues, slow credit off-take, and weak rural demand.