RBI holds on to repo rates; slashes GDP forecast to 5%

The Reserve Bank of India (RBI) decided to hold on to the key policy rates in its Thursday's monetary policy, keeping the repo rate to 5.15% and taking the market by surprise, which expected a 25 basis points (bps) cut.

However, the central bank drastically reduced the growth estimates by 110 bps to 5% from 6.1%, because of the slowdown in the economy.

"Based on the early results, the business expectations index of the Reserve Bank’s industrial outlook survey indicated a marginal pickup in business sentiments in Q4. On the positive side, however, monetary policy easing since February 2019 and the measures initiated by the Government over the last few months are expected to revive sentiment and spur domestic demand," the central bank said.

This is the first time this year, after five consecutive rate cuts, that RBI has decided to hold on to the rates. "The RBI's MPC voted unanimously in favour of maintaining the holding on to the rates. The MPC noted that economic activity has weakened further and the output gap remains negative. However, several measures have been already initiated by the government and the monetary easing undertaken by the Reserve Bank since February 2019 are gradually expected to further feed into the real economy. Data on corporate finance and on projects sanctioned by banks and financial institutions suggest some early signs of recovery in investment activity, though its sustainability needs to be watched closely. The need at this juncture is to address impediments, which are holding back investments," RBI said.

The central bank also revised inflation targets upwards to 5.1%-4.7% for H2:2019-20 and 4.0%-3.8% for H1:2020-21, with risks broadly balanced.