India’s central bank pauses after five rate cuts, lowers 2019-20 GDP growth rate to 5%

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The Reserve Bank of India (RBI) on Thursday kept the interest rates unchanged, pausing after five straight cuts, but lowered the country’s economic growth forecast for the 2019-20 financial year to 5 percent from an earlier 6.1 percent.

The RBI also raised its inflation forecast for the second half of the year to between 5.1-4.7 percent and for the first half of the 2020-2021 financial year (April-March) to between 4.0-3.8 after a meeting of its Monetary Policy Committee (MPC).

“The MPC recognises that there is monetary policy space for future action. However, given the evolving growth-inflation dynamics, the MPC felt it appropriate to take a pause at this juncture,” the central bank said.

This is the first pause after five consecutive rate cuts by the MPC since February. The policy rate was lowered by 135 basis points between February-October 2019.

The MPC 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, the RBI said, adding that these decisions were in consonance with the objective of achieving the medium-term target for consumer price index inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.

India’s economy has been in a grip of a sustained slowdown with gross domestic product (GDP) growth moderating to 4.5 per cent year-on-year in the second quarter, extending a sequential deceleration to the sixth consecutive quarter.

“Real GDP growth was weighed down by a sharp slowdown in gross fixed capital formation, cushioned by a jump in government final consumption expenditure (GFCE). Excluding GFCE, GDP growth would have been at 3.1 per cent. Growth in real private final consumption expenditure (PFCE) recovered from an 18-quarter trough. The drag from net exports eased on account of a sharper contraction in imports than in exports,” the RBI said in a statement.

Growth in the services sector moderated, weighed down mainly by trade, hotels, transport, communication, broadcasting services and construction activity. However, growth in public administration, defence and other services accelerated in line with the surge in government final consumption expenditure. Agricultural growth increased marginally, despite contraction in kharif foodgrains production in the first advance estimates, the RBI said.

“Looking beyond Q2, rabi sowing is catching up from the setback caused by delay in kharif harvesting and unseasonal rainfall in October and early November. By November 29, it was only 0.5 per cent lower than the acreage covered a year ago. North-east monsoon precipitation was 34 per cent above the long-period average up to December 4. Storage in major reservoirs, the main source of irrigation during the rabi season, was at 86 per cent of the full reservoir level as on November 28 as compared with 61 per cent in the same period a year ago,” the RBI statement added.

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