Surprisingly, The Monetary Policy Committee (MPC) of RBI has kept Repo rate unchanged (5.15%).
Repo rate nothing but a key monetary policy available with the RBI in order to manage liquidity and maintain price stability.
Prior to 2016, the RBI has complete autonomy in determining the monetary policy of the country. But after 2016, The Government of India provided for the establishment of Monetary Policy Committee (MPC) which now has responsible for India’s monetary policy.
We have seen in over the last one and half year the Indian economy is going through a massive slowdown. That is why reviving economy has been in a top list of Government of India and RBI, and fortunately inflation during this period was also under well controlled. So this gave enough room for MPC to adopt accommodate stance. It allow MPC to reduce the repo rate consistently over the last 10-12 months in order to promote investments and economic growth.
So as a part of this the MPC has reduced the repo rate by over 135 basis points (bps) in the last 10-11 months.
In a latest monetary policy that the MPC has come out with, surprised everyone’s. Because everyone is expecting another cut in interest rate but it has been kept unchanged. Despite all the rates cut that MPC did previously economic activity has not revived and India is continue showing the symptoms of economic slowdown.
Here we need to understand that why MPC has kept the repo rate unchanged even though economic growth is not revived-
- The reason lies in the threat posed by the rising food inflation over the last 3-4 months which could affect price stability. Food inflation is caused mainly due to excessive rain, floods and supply side constraints. Here the stand of MPC is that promotion of economic growth continues to remain a priority but controlling inflation has also become necessary for the time being.
- The another reason is that MPC observed that the government is likely to breach its fiscal deficit target of 3.3% of GDP.
- The MPC would also like to wait and watch for the impact of fiscal reform that the govt. might be introduced in the next budget. The Fiscal policy of government which will announce in the next budgets definitely going to impact on growth and inflation.
- MPC would also like to wait and watch for the impact of its previous rate cuts because it always take some time for the Monitory policy when there is increase or decrease in the rate cut to percolate to the ground.
Over the last 10-11 months the MPC has cut repo rate nearly 5 times and it has reduced it by 135 bps but for this reduction to transmit to the grass root will take sometime because the reduction has to be transformed by commercial banks. The need to reduce the cost of lending and this transmission is going to take sometime.
So the complete impact of the rate cuts will be felt only after few months. If the repo rate would reduce again then it might end up introducing more liquidity in the future which will pose toward inflation. That is why MPC decided to take strategic pause in order to maintain a balance between increasing economic growth and controlling inflation.