<p>With its own survey indicating enhanced fear among households about further rise in prices in the coming months, the Reserve Bank of India Thursday put a lid on its key interest rate cut cycle, a move that surprised the market, which expected the sixth consecutive cut on the back of a fast slippage in economic growth quarter-on-quarter.</p>.<p>The status quo ante leaves the policy repo rate or the rate at which RBI lends to commercial banks, unchanged at 5.15%, implying those looking for new home, auto or personal loans should not expect any reduction in interest rate. But solace to senior citizens or those dependent on interest incomes from fixed deposits. The rate of interest on their deposits will not come down for the first time in this calendar year.</p>.<p>“Our calculation shows, the January-March period, food prices in particular, will remain high... Certain other decision such as telecom tariff hike may have some impact on core inflation, too,” RBI Governor Shaktikanta Das said in a post-policy presser, emphasising inflation targeting was the prime objective of the RBI.</p>.<p>The RBI survey indicated the households’ inflation expectations increased by 120 basis points in the next three months and 180 basis points over the next one year. Additionally, manufacturing firms too expected weak demand conditions and weakening of their pricing power in October-March period of 2019-20.</p>.<p>Food inflation rose to 7.89% in October backed by a sharp increase in prices of vegetables, especially onions and tomato. Prices of pulses are also on rise in the retail market. The RBI does not see food prices easing anytime soon.</p>.<p>The monetary policy committee headed by Das also cut the economic growth forecast for 2019-20 sharply to 5% from an earlier 6.1% along with raising its inflation forecast for the second half of the fiscal, a move that impacted the equity and bond markets. While the benchmark indices -- Sensex and Nifty closed lower, the yields on the government's 10-year bonds hardened by 10 bps on concerns of lower growth, higher inflation and an expected higher fiscal deficit.</p>.<p>Das, however, reiterated that the central bank would maintain an accommodative stance as long as it was necessary to revive economic growth, which slipped to 4.5% in the July-September quarter from 7% a year ago to stand at its lowest in over six years.</p>.<p>He said instead of “mechanically” cutting rates in every policy review, it was important to wait and watch the impact of the previous 135 basis point cut on the economy.</p>.<p>Continuing with his rate cut stance ever since Das took charge as the RBI Governor, he brought down the repo rate from 6.50% to 5.15% in nine months from February to October.</p>.<p>However, the actual benefit to borrowers was not much as the transmission of the rate by banks was only 44 basis points till date, implying the bank lending rate has gone down only by 44bps as against 135 bps cut by the RBI.</p>.<p>“The pause in the rate cycle comes as a surprise given the dismal growth for the second quarter of 2019-20 and the likely persistence of a slowdown. Clearly the RBI has responded to hardening headline inflation and rising inflation expectations of households. This suggests two things. Any sustained increase in headline CPI inflation above the median of the target range of 2 to 6% will make the MPC anxious and translate into a pause. It also seems that the RBI wishes to see the lagged impact of its front-loaded 135 basis point cut in the policy rate along with some of the slew of fiscal measures plays out for future growth,” HDFC Bank Chief Economist Abheek Barua said.</p>
<p>With its own survey indicating enhanced fear among households about further rise in prices in the coming months, the Reserve Bank of India Thursday put a lid on its key interest rate cut cycle, a move that surprised the market, which expected the sixth consecutive cut on the back of a fast slippage in economic growth quarter-on-quarter.</p>.<p>The status quo ante leaves the policy repo rate or the rate at which RBI lends to commercial banks, unchanged at 5.15%, implying those looking for new home, auto or personal loans should not expect any reduction in interest rate. But solace to senior citizens or those dependent on interest incomes from fixed deposits. The rate of interest on their deposits will not come down for the first time in this calendar year.</p>.<p>“Our calculation shows, the January-March period, food prices in particular, will remain high... Certain other decision such as telecom tariff hike may have some impact on core inflation, too,” RBI Governor Shaktikanta Das said in a post-policy presser, emphasising inflation targeting was the prime objective of the RBI.</p>.<p>The RBI survey indicated the households’ inflation expectations increased by 120 basis points in the next three months and 180 basis points over the next one year. Additionally, manufacturing firms too expected weak demand conditions and weakening of their pricing power in October-March period of 2019-20.</p>.<p>Food inflation rose to 7.89% in October backed by a sharp increase in prices of vegetables, especially onions and tomato. Prices of pulses are also on rise in the retail market. The RBI does not see food prices easing anytime soon.</p>.<p>The monetary policy committee headed by Das also cut the economic growth forecast for 2019-20 sharply to 5% from an earlier 6.1% along with raising its inflation forecast for the second half of the fiscal, a move that impacted the equity and bond markets. While the benchmark indices -- Sensex and Nifty closed lower, the yields on the government's 10-year bonds hardened by 10 bps on concerns of lower growth, higher inflation and an expected higher fiscal deficit.</p>.<p>Das, however, reiterated that the central bank would maintain an accommodative stance as long as it was necessary to revive economic growth, which slipped to 4.5% in the July-September quarter from 7% a year ago to stand at its lowest in over six years.</p>.<p>He said instead of “mechanically” cutting rates in every policy review, it was important to wait and watch the impact of the previous 135 basis point cut on the economy.</p>.<p>Continuing with his rate cut stance ever since Das took charge as the RBI Governor, he brought down the repo rate from 6.50% to 5.15% in nine months from February to October.</p>.<p>However, the actual benefit to borrowers was not much as the transmission of the rate by banks was only 44 basis points till date, implying the bank lending rate has gone down only by 44bps as against 135 bps cut by the RBI.</p>.<p>“The pause in the rate cycle comes as a surprise given the dismal growth for the second quarter of 2019-20 and the likely persistence of a slowdown. Clearly the RBI has responded to hardening headline inflation and rising inflation expectations of households. This suggests two things. Any sustained increase in headline CPI inflation above the median of the target range of 2 to 6% will make the MPC anxious and translate into a pause. It also seems that the RBI wishes to see the lagged impact of its front-loaded 135 basis point cut in the policy rate along with some of the slew of fiscal measures plays out for future growth,” HDFC Bank Chief Economist Abheek Barua said.</p>
