Despite acknowledging that inflation surged above tolerance level and the economy continued to be weak, the central bank’s MPC sees policy space available for future rate action.
At the last monetary policy meeting of FY20, the central bank kept the interest rate unchanged, with a warning to not read the ‘pause’ continually for its future actions.
Following Saturday’s 987.96-point fall, the S&P BSE Sensex closing at 39,872.31, just 136.78 points higher, on Monday shows that the markets are still unhappy with the Budget.
Notwithstanding headline inflation being at a five-year high of 7.4%, Nomura expects the RBI to extend its pause; but the next policy move is still likely to be a rate cut in Q2 to boost growth.
The Monetary Policy Committee meeting minutes reveal that its members were bogged down by rising inflation and slowing growth, which could mean status quo going forward.
The Reserve Bank of India has announced a special Open Market Operation for purchase and sale of government securities on December 23 to address liquidity issues and lower long-term bond yields.
The central bank, according to the policy statement, intends to continue with an accommodative stance as long as it is necessary to revive growth, while ensuring inflation remains within target.
The 35 basis point repo rate cut is not the first unconventional rate action from the central bank as two repo rate actions in March 2003 saw a 40 and 10 basis points reduction in a matter of 13 days.
