RBI Holds Interest Rate Steady On Inflation Concerns

The Reserve Bank of India today held interest rates steady, as was largely expected. The repo rate under the liquidity adjustment facility (LAF) has been left unchanged at 5.15 per cent.

Mounting inflation concerns, especially rising food inflation, may have largely to do with the decision to hold interest rates steady. Stock markets were quiet and bonds barely moved, as the decision was largely on expected lines. Some analysts foresee the possibility of interest rates being held through the calendar year 2020.

The Monetary Policy Committee also decided to continue with the accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target.

"In the fifth bi-monthly resolution of December 2019, CPI inflation was projected at 5.1-4.7 per cent for H2:2019-20 and 4.0-3.8 per cent for H1:2020-21, with risks broadly balanced. The actual inflation outcome for Q2 at 5.8 per cent overshot projections by 70 bps, primarily due to the intensification of the onion price shock in December 2019 on account of unseasonal rains in October-November," the RBI said in a release.

Economy remains weak says RBI

The RBI also noted that the country's economy continues to remain weak.

"The MPC observes that the economy continues to be weak and the output gap remains negative. While some high-frequency indicators have turned around and point to a lift in the momentum of economic activity, there is a need to await incoming data to gauge their sustainability," the country's central banks said.

Financial flows to the commercial sector have improved in recent months. The Union Budget 2020-21 has introduced several measures to provide an impetus to growth. While the emphasis on boosting the rural economy and infrastructure should help the growth momentum in the near-term, the corporate tax rate cuts of September 2019 should help boost the growth potential over the medium-term.