Contrary to the expectations, the RBI did not cut the Repo rate in its monetary policy review in December. The current repo rate stands at 5.15%.
The analysts expected RBI to cut the Repo rate to spur economic growth given that India’s GDP fell to 4.5 % in July-Sept quarter 2019-20.
[Read: Repo, CRR, SLR, Reverse Repo, Bank Rate- Explained]
The decision was unanimous. All six members of the Monetary Policy Committee voted in favour of maintaining a status quo.
[Read: Monetary Policy Committee Explained]
The monetary policy stance remained accommodative and the RBI revised its growth forecasts for 2019-20 downwards to 5 % from 6.1 %.
The RBI has already cut the Repo rate by 135 basis points (1.35 %) this year. It has temporarily paused the rate cut cycle to let its previous cuts transmit into the system fully. Even though RBI has cut rates, the banks haven’t passed it on to the borrowers.
This is because the marginal cost of funds based lending rates (MCLR) haven’t come down. The MCLR is the minimum rate below which the banks cannot lend. As against the rate cut of 135 basis points in 2019, banks’ MCLR is down by only 49 bps. (The reason being, apart from other components, MCLR includes deposit rates which hasn’t changed much).
[Read: The MCLR Explained]
Though the RBI has not mentioned anything, it might take steps in the recent future to drive up the monetary policy transmission. (To be noted that the interest rates have been better transmitted in debt market)
Some analysts have argued that inefficient monetary policy transmission is precisely the reason why the RBI should have cut interest rates as it takes a while for it to reflect on the lending rates of banks.
Another reason for a pause in the rate cuts is that the primary mandate of the Monetary Policy Committee is to control inflation. After a prolonged person of low inflation, the October Consumer Price Index (CPI) based Inflation is at 16 months high of 4.62 %. The RBI has revised up its inflation forecast for the second half of the fiscal year to 5.1 % – 4.7%.
But, critics have argued that high inflation is because of the higher food prices. The core inflation (excluding food and fuel prices) actually slowed to a 94 month low of 3.47 % in October. Also, the Wholesale Price Index (WPI) based inflation was at 3 years low of 0.16 %. These reflect the slowdown in the economy and the RBI should have acted accordingly.
[Read: Inflation; CPI; WPI demystified]
Lastly, the Government will unveil the budget for the next fiscal year in February. The RBI wants to be better informed about the measures taken by the Government to tackle the slowdown.
[Read: Why is the Indian Economy in a slowdown?]
To sum up, even though the RBI hasn’t cut rates, it has maintained the accommodative stance of the monetary policy. It could provide a monetary stimulus in the next monetary policy review meeting in February after the budget is announced and the inflation remains in control.