While the finance minister seems unperturbed by the rising prices of onions, the monetary policy committee certainly seems to have taken note of it. The committee was unequivocal in its stance to keep the rates unchanged, despite the slowdown in India’s GDP.
A majority of 34 economists polled by Bloomberg had predicted a 25bps rate cut. However, contrary to expectation, the committee kept the repo rate at 5.15% and its stance ‘accomodative’.
Rising vegetable prices (especially like onion) and sustained pressure on milk and pulses have clearly unnerved the RBI. It has prioritised keeping inflation in check, over stimulating growth.
Consequently, the RBI has raised its inflation projection for the second half of the current financial year to 4.7%-5.1% from 3.5%-3.7% earlier. This was enough to spook the panel despite the poor September quarter GDP numbers and high frequency indicators suggesting that domestic demand conditions remain weak.
RBI also lowered its GDP estimates for the current fiscal to 5 percent from 6.1 percent earlier. It expects the economy to start recovering from the first half of FY21.
Furthermore, the RBI expects the effect of banks benchmarking their rates to the repo rate in the coming months. While there is scope for further rate cut, the committee chose to wait and observe how the dynamics in the economy play out.
There also some indications that capex cycle maybe turning around as companies are using the corporate tax rate cut to deleverage balance sheet, and invest in capex.
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