The Reserve Bank of India kept its key lending rate on hold in a shock decision, despite a worrying slowdown in the country that prompted the central bank to sharply reduce its economic growth forecast to 5 percent for the year through March.
The central bank acknowledged on Thursday that it does have room to cut rates further, but said it was concerned about near-term inflation, as the headline rate breached its medium-term target for the first time in more than a year.
“The MPC recognises that there is monetary policy space for future action. However, given the evolving growth-inflation dynamics, the MPC felt it appropriate to take a pause at this juncture,” the committee said in a statement.
Economists polled by Reuters and Bloomberg had unanimously predicted that India’s central bank would choose to cut rates for the sixth time in a row, as economic growth slowed to its weakest level in more than six years for the three months ending in September.
“The decision was mainly a result of inflation rising over the past few months, so it looks like the central bank took more of a cautionary approach,” Darren Aw, Asia economist at Capital Economics told Al Jazeera.
“But RBI’s accommodative stance is unchanged, so it could still cut rates during the next monetary policy meeting in February (2020)” he added.
The central bank reiterated that it would maintain an accommodative stance “as long as it is necessary to revive economic growth, while ensuring that inflation remains within the target.”
The RBI lowered its gross domestic product (GDP) growth forecast for the year ending March 2020 to 5 percent from 6.1 percent, while raising its headline inflation projection for the second half of the ongoing financial year to between 5.1 percent and 4.9 percent, from an earlier forecast of 3.5 percent to 3.7 percent.
India’s economic growth slowed to 4.5 percent in the September quarter from 7 percent a year ago and the economy is expanding well below the rate needed to generate enough jobs for the millions of young Indians entering the labour market each month.
“There is speculation that there could be further tax cuts, but it’s difficult to say if fiscal policy would be loosened further. It wouldn’t be surprising if it was,” Singapore-based Aw said.
The six-member monetary policy committee (MPC) unanimously voted to hold the key repo rate at 5.15 percent while the reverse repo rate was also held at 4.9 percent.
Financial markets reacted negatively, with shares on the NSE Nifty 50 index falling 0.27 percent and the benchmark S&P BSE Sensex slipping 0.18 percent following the decision.
The benchmark 10-year bond yield spiked sharply to 6.591 percent versus the pre-policy level of 6.4735 percent, while the partially convertible rupee currency weakened to 71.59 per dollar from 71.50 before the decision.
“The need at this juncture is to address impediments, which are holding back investments,” the RBI said.
A Reuters poll of 70 economists had predicted the RBI would cut its repo rate by 25 bps and then by another 15 bps in the second quarter of 2020, where it will stay at least until 2021.