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RBI surprises by holding policy rates; slashes GDP growth outlook for 2019-20 to 5 per cent

All the six members of the MPC voted in favour of a rate pause. The CPI inflation projection is revised upwards to 5.1-4.7 per cent for H2 FY20 and 4-3.8 per cent for H1 FY21.

Published: 05th December 2019 12:00 PM  |   Last Updated: 05th December 2019 12:41 PM   |  A+A-

RBI Governor Shaktikanta Das

RBI Governor Shaktikanta Das (Photo | PTI)

By Express News Service

HYDERABAD: Contrary to consensus expectations,  the RBI Thursday kept key policy rates unchanged keeping in view rising inflationary trends.  

Disappointingly, real GDP growth for FY20 is revised downwards from 6.1 per cent in the October policy to 5 per cent for FY20

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Even as it recognized India's weakening growth, the central bank preferred to pause in order to assess the impact of the recent government measures to stimulate the economy. In essence, it passed the baton of lifting the sagging economy to the forthcoming Union Budget in February.

As such, the repo rate, the rate at which banks borrow from the central bank, stands at 5.15 per cent, while the reverse repo rate too remains unchanged at 4.90 per cent and the marginal standing facility (MSF) rate and the Bank Rate at 5.40 per cent.

"While improved monetary transmission and a quick resolution of global trade tensions are possible upsides to growth projections, a delay in the revival of domestic demand, a further slowdown in global economic activity and geo-political tensions are downside risks," the MPC noted.

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For borrowers, though, the RBI hoped that linking of loans to external benchmark and transmission of its earlier rate reductions will work their way into the market. But sending out a strong signal that it will bite the bullet if need be, the MPC decided to continue with its accommodative stance as long as it is necessary to revive growth while ensuring that inflation remains within the target.

As against the cumulative reduction in the policy repo rate by 135 bps during February-October 2019, transmission to various money and corporate debt market segments ranging from 137 bps (overnight call money market) to 218 bps (3-month CPs of non-banking finance companies).

Transmission to the government securities market, however, has been partial at 113 bps (5-year government securities) and 89 bps (10-year government securities). Credit market transmission remains delayed but is picking up, the MPC noted.

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In the fourth bi-monthly resolution of October 2019, CPI inflation was projected at 3.4 per cent for Q2FY20, 3.5-3.7 per cent for H2:2019-20 and 3.6 per cent for Q1:2020-21 with risks evenly balanced. 

Overall liquidity in the system remained in surplus in October and November 2019 despite an expansion of currency in circulation due to festival demand. Average daily net absorption under the LAF amounted to rs 1,98,566 crore in October. 


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