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Updated: Dec 06, 2019 01:34 IST

The Reserve Bank of India (RBI) defied expectations by keeping its policy rate unchanged at 5.15% even as it downgraded its growth projection for the year to 5% — an indication, experts said, that the central bank either understands the limited role of monetary interventions in reviving growth or wants to wait till banks pass on the earlier cuts or both. They added that RBI may have also turned cautious because of a recent spike in inflation.

The move surprised many, with the consensus opinion ahead of the policy being that RBI would continue to ease interest rates to revive growth. Gross Domestic Product (GDP) growth for the three months ended September came in at 4.5%, the lowest since March 2013.

Still, RBI, which has thus far cut rates by 1.35 percentage points since February 2019, hinted that it did have room to cut rates in the future if required.

RBI’s monetary policy committee (MPC) cut policy rates for five consecutive meetings till Thursday’s. The pause also means that the central bank is looking to the government to announce measures to pump-prime the Indian economy, which is expected to grow at a much slower rate than earlier expectations.

MPC has brought down its projected GDP growth rate for the Indian economy in the current fiscal year to 5%, 1.1 percentage points less than what it projected in its October meeting. On a cumulative basis, MPC has reduced the projected growth rate in the current fiscal year by 2.4 percentage points, from 7.4% in February to 5% in December.

The government has taken 32 measures to revive the economy, finance minister Nirmala Sitharaman told Parliament last week. This includes a corporate tax rate cut, easier access to credit for non-banking financial companies, a real estate fund, and a more transparent and efficient income tax regime. The MPC is clearly hoping the government will do more. “Similarly, the forthcoming Union budget will provide better insight into further measures to be undertaken by the government and their impact on growth,” RBI’s policy statement said.

Last week, after the GDP numbers were announced, Atanu Chakraborty, secretary of the department of economic affairs, said that the economy had bottomed out, suggesting that the rest of the year will be better.

The recent spike in inflation might have played a role in the MPC deciding against a sixth consecutive rate cut. The Consumer Price Index (CPI), India’s benchmark inflation measure, grew 4.6% on an annual basis in October 2019, the highest since 4.9% in June 2018. While the MPC has expressed confidence that inflation is likely to moderate below target by the second quarter of next fiscal year, it said that it is “prudent to carefully monitor incoming data to gain clarity on the inflation outlook”.

The MPC’s actions become clearer when seen in the context of the results of the latest bimonthly Consumer Confidence Survey (CCS), which is conducted in 13 major cities in the country. Consumer sentiment has worsened on most crucial indicators such as the general economic situation, income, employment, non-essential spending, etc, between the previous and latest survey, which was conducted in November.

Consumer sentiment is the lowest on employment and non-essential spending. “Various high frequency indicators suggest that domestic and external demand conditions have remained weak,” the resolution said. However, the MPC has expressed hope that “several measures already initiated by the Government and the monetary easing undertaken by the Reserve Bank since February 2019 are gradually expected to feed in the economy” and called for an emphasis on addressing “impediments which are holding back investments”.

To be sure, some experts believe the government needs to embark on a major demand push, perhaps through a rural spending programme or income tax cuts, to simply put more money in the hands of people. Finance minister Sitharaman said this week that the government is evaluating income tax cuts.

“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. There has been some active consultation between industry and government, and we expect that between now and the next Union budget some of the additional measures suggested by the industry will be implemented,” Sandip Somany, president of the Federation of Indian Chambers of Commerce and Industry, said.

The next budget will be presented on February 1, 2020.

“The pause in the rate cycle comes as a surprise given the dismal growth for the second quarter of 2019-20 and the likely persistence of a slowdown. Clearly the RBI has responded to hardening headline inflation and rising inflation expectations of households. It also seems that the RBI wishes to see the lagged impact of its front-loaded 135 basis point cut in the policy rate along and how some of the slew of fiscal measures will play out for future growth,” Abheek Barua, chief economist of HDFC Bank, said.