Monetary Policy Review - December 2019

Why in news?

The RBI, in its latest monetary policy review (December 2019), has kept the repo and reverse repo rates unchanged.

Why is the decision significant?

The RBI has cut the policy rate (repo rate) consecutively in the preceding five monetary policy reviews.
There has been a cumulative 135 basis points cut since February 2019.
But the RBI now seems to have decided to pause this trend, by holding the interest rate.

What is the RBI’s rationale?

Economic growth concerns are still paramount which might call for a rate cut.
However, a lot has changed between the earlier policies and now.
Inflation is on an upward trend, and so a rate cut may turn out disadvantageous.
Macro numbers indicate a considerable slippage in the fiscal deficit target of 3.3% for this fiscal.
But, the government’s approach to the fiscal deficit glide path is still unclear.
Moreover, the effects of rate cuts since February still need to percolate down through the system, which is lagging.
If RBI continues to cut rates without the cuts being transmitted down the line, the instrumental role of rate cuts in boosting growth may not happen.
The Monetary Policy Committee (MPC) has thus taken care to point out that “there is monetary policy space for future action.”
Hence, the accommodative stance will continue.
The MPC also wants to watch the government’s moves in the budget before easing rates again.
The RBI has, however, clearly indicated that facilitating growth is still at the top of its agenda.

What are the latest growth projections?

Acknowledging the dismal growth in the second quarter, the MPC has revised the growth projections for fiscal 2019-20.
It has revised it sharply downwards to 5% from the 6.1% it had projected in the October 2019 policy.
On inflation, the RBI has projected a significant rise in the second half of the 2019-20 fiscal.
However, there is optimism that the spike is temporary.
It is driven largely by rising prices of food items due to unseasonal rains that destroyed standing kharif crops.
Given these, it seems to be a strategic pause by the MPC to watch how inflation moves and what the government does in the budget.

Source: The Hindu