- RBI shocks the street by leaving interest rates unchanged contrary to market expectations.
- The decision to hold interest rates was triggered by the recent spike in inflation.
- RBI has already cut interest rates five times this year but the lending rates offered by banks have come down much lesser.
The Reserve Bank of India shocks the street by leaving interest rates unchanged contrary to market expectations. The decision to hold interest rates was triggered by the recent spike in inflation. RBI has already cut interest rates five times this year but the lending rates offered by banks have come down much lesser.
Repo rate, the interest that the RBI charges banks for lending money to them, is already at a ten-year low.
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1. India's real GDP growth estimate cut to 5% for the full-year ending March 2020.
2. The decision to leave interest rate unchanged was 'unanimous'.
3. Since the October meeting, global economic condition has been subdued though there are some signs of resilience.
4. Rabi sowing (the winter crop) was down only 5% by November 29 compared to a year ago. This signals recovery according to the monetary policy panel.
5. Governor Das cited the improvement in manufacturing PMI as a sign of economic recovery.
6. Net foreign direct investment rose 17% in the first half of the fiscal year and the net foreign portfolio investments (money invested in shares and bonds) were over $8 billion at the end of November compared to a net outflow a year earlier.
7. Manufacturing firms expect weak demand in the October-December quarter and fear further erosion of pricing power.
8. Economic activity has weakened further but a lot of steps already taken by the government and the RBI will help improve the economy.
9. The forthcoming budget will also provide further insight into the government's efforts to improve the economic growth. The monetary policy panel decided it was prudent to pause at this stage and wait for data and government's policy measures.
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10. There is space further available for monetary policy actions but there is a need to optimise the impact of the interest rate cuts. We should give more time for the banks to pass on the interest rate cuts provided so far. The timing of the next rate cut will also be important.
11. On-tap licensing guidelines for small finance banks will be issued today.
14. There is also surplus liquidity in the system. RBI is absorbing about ₹2.5 lakh crore ($35 billion) everyday.
Quantitative easing was the same policy adopted by the central banks in developed economies like the US and Europe after the global financial crisis brought the credit market to a grinding halt. In India too, right now, risk-averse banks prefer to keep the money in safes instead of risking it in the form of loans, especially to the crippled non-banking financial companies.
