RBI's rate setting panel starts meeting amid rising inflation, slowing GDP

The Monetary Policy Committee (MPC) has begun its meeting from February 4-6 for the policy review, the RBI said in a release.

RBI

Published : Feb 4, 2020, 1:01 PM IST

Updated : Feb 4, 2020, 5:20 PM IST

Mumbai: Reserve Bank of India Governor Shaktikanta Das headed six-member rate-setting panel started its three-day brainstorming meeting on Tuesday in the backdrop of Union Budget projecting a widening of fiscal deficit amid slowing economy and hardening inflation.

The Monetary Policy Committee (MPC), which announces the benchmark lending rate (repo) on a bi-monthly basis, has been tasked by the government to tame retail inflation based on Consumer Price Index (CPI) at 4 per cent (+,- 2 per cent).

Change in RBI's Repo Rate

The retail inflation that for several months remained in the comfort zone of the central bank has started inching up and crossed the 7 per cent mark during December 2019, mainly due to spiralling prices of vegetables.

Experts said the MPC members are going to have a tough time as slowing economy makes the case for reduction in repo rate while rising inflation and higher fiscal deficit will require the central bank to either hike the rate or maintain a status quo.

The sixth bi-monthly monetary policy statement for 2019-20 will be announced at 1145 hours on Thursday.

The government has estimated India's gross domestic product (GDP) at 5 per cent in the current financial year owing to both domestic as well as global factors amid weakening consumption demand in the country.

In December, retail inflation also peaked to a five-year high of 7.3 per cent, mainly due to costlier vegetables, specifically onion and tomato.

In its previous monetary policy review in December, the RBI had decided for a status quo, leaving the repo unchanged at 5.15 per cent on concerns of rising inflation.

While presenting the Union Budget on February 1, Finance Minister Nirmala Sitharaman projected the fiscal deficit to widen to 3.8 per cent of the GDP against the earlier estimate of 3.3 per cent.

A higher fiscal deficit in simple terms means the government will go in for more market borrowing leading to hardening of interest rate which in turn will put pressure on inflation.

(PTI Report)

Change in RBI's Repo Rate

The sixth bi-monthly monetary policy statement for 2019-20 will be announced at 1145 hours on Thursday.

In December, retail inflation also peaked to a five-year high of 7.3 per cent, mainly due to costlier vegetables, specifically onion and tomato.

In its previous monetary policy review in December, the RBI had decided for a status quo, leaving the repo unchanged at 5.15 per cent on concerns of rising inflation.

While presenting the Union Budget on February 1, Finance Minister Nirmala Sitharaman projected the fiscal deficit to widen to 3.8 per cent of the GDP against the earlier estimate of 3.3 per cent.

A higher fiscal deficit in simple terms means the government will go in for more market borrowing leading to hardening of interest rate which in turn will put pressure on inflation.

(PTI Report)

Intro:Body:

Mumbai: Amid slowing GDP growth and rising inflation, the Reserve Bank of India (RBI) will unveil its last monetary policy for the current financial year on Thursday.

The sixth bi-monthly monetary policy statement for 2019-20 would be the last one for the current financial year.

The Monetary Policy Committee (MPC) has begun its meeting from February 4-6 for the policy review, the RBI said in a release.

The RBI said it will place the resolution of the MPC on its website before noon on February 6.

The government has estimated India's gross domestic product (GDP) to be growing at a slower pace of 5 per cent in the current financial year on the back of various factors, domestic and global, including weakening consumption demand in the country.

In December, the retail inflation also peaked to a five-year high of 7.3 per cent, mainly due to costlier vegetables, specifically onion and tomato.

Read more:Two tax systems give flexibility, widen people's choice: Rev Secy

The Economic Survey 2019-20 has projected the Indian economy to grow at around 6-6.5 per cent in the next financial year beginning April 2020.

"With fiscal policy taking a growth-supportive role, on the back of monetary policy being ahead of the curve last year, the calibrated policy mix should bode well for growth."

"We look for the central bank to remain on an extended pause on rates (even as supply-induced shocks dissipate) but maintain an accommodative bias to ensure cost of capital remains stable and favourable," Radhika Rao, senior vice-president and economist, DBS Group Research, said.

Crisil Ratings in its post-Union Budget 2020-21 comment has said, "Monetary policy has done its bit, but with moderate and slow success."

It added that the RBI cut the repo rate cumulatively by 135 basis points (bps) through calendar 2019, but lending rates tarried with just nearly 50-bps decline. "Even as credit demand has fallen, risk aversion and weak sentiment have affected the willingness to supply credit, too."

In its previous monetary policy review in December, the RBI had decided for a status quo, leaving the key repo, the rate at which it lends to banks at 5.15 per cent.

Conclusion:

Last Updated : Feb 4, 2020, 5:20 PM IST

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RBI's rate setting panel starts meeting amid rising inflation, slowing GDP

The Monetary Policy Committee (MPC) has begun its meeting from February 4-6 for the policy review, the RBI said in a release.

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