The Reserve Bank of India (RBI) on Thursday kept policy rates unchanged for the second time in a row as it saw inflation “elevated and on a rising trajectory” until March — a move that came amid concerns of a sluggish economy and increased risks owing to global fears over the coronavirus outbreak.
All six members of the Monetary Policy Committee (MPC), led by RBI governor Shaktikanta Das, unanimously decided to maintain the repurchase or repo rate at 5.15%, while striking a note of caution on the state of the economy.
The MPC, however, retained its accommodative stance, which means that interest rates can be lowered in the future. It said that “the economy continues to be weak”, even as it has projected a 6% GDP growth rate for 2020-21. The RBI’s Consumer Confidence Survey (CCS) shows a continued deterioration in consumer sentiment, despite other high-frequency economic indicators showing an improvement in December and January.
“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,” the RBI governor said at a news briefing after the announcement of the MPC decision.
“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 added.
Economists polled by Reuters had expected the MPC to leave its key repo rate unchanged at 5.15% and reverse repo rate at 4.9%.
In its first bimonthly meeting in 2020, which concluded on Friday, MPC decided to continue with a pause on policy rates, same as it did in its December meeting. MPC reduced policy rates by 135 basis points between February 2019 and October 2019. One basis point is one-hundredth of a percentage point.
The pause in rate cuts has been accompanied by an upward revision in inflation projections. MPC has projected Consumer Price Index (CPI) to grow at 6.5% in the quarter ending March 2020. CPI growth in the quarter ending December 2019 was 5.8%. MPC expects CPI to grow at 5.4-5% in the two quarters during the first half (April 2020-September 2020) of the next fiscal year. This is significantly more than the average 3.3% growth in CPI in the first half of 2019-20. CPI growth in the month of December (latest available data) was 7.35%.
When seen in this context, RBI’s projections suggest that while inflation may have started coming down from the peak of December levels, the moderation will only happen gradually.
“Given the evolving growth-inflation dynamics, the MPC felt it appropriate to maintain status quo,” MPC’s resolution said.
MPC has also projected that the Indian economy will grow at 6% in 2020-21. This is slightly more than the 5.8% growth projection given in the International Monetary Fund’s (IMF) revised World Economic Outlook released in January. It is at the lower band of the 6-6.5% growth projection made in the 2019-20 Economic Survey released by the finance ministry.
The projection for GDP growth in the first half of the next fiscal year has also been revised downwards from 5.9-6.3% in December 2019 to 5.5-6% in February.
India’s GDP growth plummeted to 4.5%, the lowest since March 2013, in the quarter ending September 2019. The National Statistical Office (NSO) has projected India’s GDP growth to be 5% in 2019-20.
Various forward-looking surveys that are released with the MPC resolution give a mixed picture about the economy. Results from RBI’s Order Books, Inventories and Capacity Utilisation Survey for July-September 2019, which were released on Friday, show that capacity utilisation in the September quarter fell to 69.1%, the lowest since the quarter ending June 2008, the earliest period for which data is available. To be sure, the Industrial Outlook Survey suggests that the economy may have bottomed out in the December quarter and things are improving. The Business Expectation Index (BEI) fell to 102.2 in the December quarter, the lowest since June 2009. It is expected to recover to 105 in the March quarter.
This is in keeping with trends from other high-frequency indicators. The Index of Industrial Production (IIP) grew at 1.8% in November 2019 after contracting consecutively for three months. Index of core sector industries grew at 1.3% in December 2019 after contracting for four consecutive months. The composite Purchasing Managers’ Index (PMI) for manufacturing and services has increased for three consecutive months until January 2020, when it reached 56.3, the highest since June 2018, the earliest period for which data is available.
While business sentiment seems to be improving, consumer sentiment continues to be weak. Results from the January round of CCS show that both current and one year ahead perception on general economic situation, income and non-essential spending have fallen further between the November and January rounds.
The net present perception on all three indicators is negative, which means that the share of respondents who have a negative perception of things is greater than those who have a positive outlook.
“The MPC has expectedly kept the policy rate and stance unchanged given the inflation trajectory overshooting beyond the upper level of the target band of the committee. Very aptly, the MPC has addressed the growth concerns through pushing transmission via tweaking the liquidity framework, providing LTROs and incentivising credit to select sectors. We expect these measures to aid transmission with the shorter end of the yield curve expected to rally meaningfully. These measures should help availability of funds at lower costs and aid sectors in stress,” said Upasna Bhardwaj, senior economist at Kotak Mahindra Bank.
