Reserve Bank of India keeps interest rate on hold, likely to cut rate in June

The Reserve Bank of India kept the policy repo rate on hold today for the second consecutive time. The decision to maintain the interest rate and the accommodative stance was unanimous.

The central bank upwardly revised its inflation forecasts to 6.5 percent for the fourth quarter of fiscal FY20,), 5.4-5 percent for H1 FY21 and 3.2 percent for Q3 FY21. Food inflation is likely to ease and base effects are likely to turn more favourable in the third quarter FY21, but factors such as volatile crude oil prices, higher input services cost and volatile financial markets are expected to pose headwinds to headline inflation. The MPC noted risks to global growth because of the outbreak of the Novel Coronavirus, but the effect would only be known in due course.

Meanwhile, the GDP growth forecast for fiscal year ending March 2020 was kept unchanged at 5 percent. For FY21, GDP growth forecast was raised to 6 percent. The MPC noted that the rationalism of personal income taxes in FY21 budget should be supportive of domestic demand and stimulate rural spending.

“Based on our expectations that inflation will likely have peaked in January (and moderating from February onwards) in addition to the MPC’s insistence that room for further easing is available, we retain our call for a 25bp reduction in the repo rate in June”, stated ANZ in a research report.