Food inflation will be very high from January to March 2020, warns RBI governor as he keeps interest rates unchanged

  • RBI keeps interest rates unchanged even as the market was expecting a rate cut.

  • This year, RBI has cut interest rates by five times, consecutively.

  • India’s interest rates are already at a ten-year low.

  • Most experts have been hoping for a 25 basis point rate cut this time too, some expected a 50 bps cut.
India's central bank has taken note of the pains of households who are struggling with rising food prices, at this monetary policy committee (MPC) review. Hence, in spite of being burdened with the task of pushing a slowing economy, the RBI kept its interest rates unchanged at 5.15%.

Had RBI cut interest rates again, it would have brought more money into the system, which would hike prices of essential items. The interest rate is at which RBI lends to the banks who are then expected to give out cheaper loans.

This however is a shocker for market watchers and investors who have been expecting a 25 basis point rate cut. In fact, after the dismal second quarter GDP which grew at a mere 4.5%, economists have been batting for 50 basis point rate cut.

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But the decision to keep rates unchanged was 'unanimous' at the meeting held today. "Food inflation will be very high from January to March 2020," said Shaktikanta Das, the governor of RBI told the press conference.

The country’s interest rates, after five successive cuts in all the MPC review meetings meeting this year -- is already at its lowest in ten years. But it was not enough.

And the lack of a rate cut yet again disappointed many including Sensex which dropped 100 points right after the announcement.

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"With the growth projection for the current year being revised down from 6.1% to 5%, both government and the central bank should initiate some stronger measures to break the logjam particularly in the stressed sectors of the economy," said Sandip Somany, president of industry body, FICCI.


“Despite the policy initiatives taken by the government during the past few months and RBI’s continued accommodative stance, the GDP grew at a much lower rate in the second quarter, the lowest in last 26 quarters. This has confirmed the fears of continuing slowing down of Indian economy. Much of the Q2 growth in GDP came in through rising Government Final Consumption Expenditure (GFCE),” said Dr M Govinda Rao, chief economic advisor at Brickwork Ratings.

The governor Shaktikanta Das who had the benefit of low inflation for the last few credit policies. But in the last two months, food inflation –especially with regards to vegetables has been high. It means Das has to do a much more sensitive balancing act.
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This time, the expectations are also sky high expectations. “The recovery is unlikely to be V-shaped as consumer demand, credit supply and risk appetite remains lacklustre. This and the falling core-CPI should allow the RBI focus more on growth, while a major fiscal stimulus is hindered by the lack of available household financial savings,” said Sreejith Balasubramanian, economist - fund management at IDFC AMC.


SEE ALSO
Top highlights from RBI Governor Shaktikanta Das' speech after the credit policy review
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