RBI Interest Rate: Strategy Behind Interest Rate

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RBI Interest Rate- Strategy Behind RBI To Holding Interest Rate till Coming Budget. Read full Artcile –

After a run of five consecutive rate cuts, which began in February, the Reserve Bank of India (RBI) decided to pause and catch its breath in the December policy announced on Thursday.

Although concerns about growth remain paramount, much has changed between past policies and now: inflation is rising again and the government’s focus on the path of fiscal deficit slippage is still unclear, even when macro numbers indicate a considerable slide in the target of 3.3% for this prosecutor.

Monetary policy works with a delay and the cut of 135 basis points since February needs to filter through the system and analyze its impact. The RBI runs the risk of reducing the weapon of repos rate if it continues to reduce the rates without the cuts being transmitted along the line.

The Monetary Policy Committee (MPC) has taken care to point out that “there is space for monetary policy for future actions” and that the accommodative stance will continue. This should soften the curly feathers of the market that expected a cut of 25 basis points. In that sense, the RBI has surprised the market after a long time, but it also clearly indicated that facilitating growth is still at the top of its agenda. Although the Governor, Mr. Shaktikanta Das, did everything possible to clarify that fiscal concerns were only a contribution in the decision, it is obvious that the MPC wants to see government movements in the budget before lowering rates again.

A cut now followed by a large slide in the fiscal deficit would have complicated things for the MPC. Recognizing the lousy growth in the second quarter, the MPC has revised the growth projections for the 2019-20 fiscal year strongly down to 5% from the 6.1% it had projected in October policy. How did the brand’s MPC so much?

The Governor has referred to green shoots in the economy, such as the increase in the November Purchasing Managers Index for manufacturing and the late delay in rabbi planting. He also referred to a study of the unaudited financial results of 1,539 publicly traded companies, which shows companies that transfer funds from financial investments to fixed assets, indicating a possible revival in the capital expenditure cycle. But it is still the first days and the incoming data must be carefully observed before a final evaluation can be made.

In terms of inflation, the central bank has projected a significant increase in the second half of this fiscal year, but it is optimistic that the increase is temporarily driven largely by the increase in food prices due to seasonal rains that destroyed the crops of kharif standing. After all, this seems to be a strategic pause by the MPC to observe how inflation moves and what the government does in the budget. The speed reduction cycle still has some steam left.

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