RBI governor Shaktikanta Das (AFP)
RBI governor Shaktikanta Das (AFP)

RBI sets up for more rate cuts with lower inflation estimate

  • In a shift in stance, inflation estimates for the first half of 2019-20 cut to 3.2%-3.4% from the earlier 3.8-4.2%
  • RBI also keeping an eye on GST collections, says Shaktikanta Das

New Delhi: The monetary policy committee of the Reserve Bank of India has set itself up for another rate cut by lowering its estimates for 2019-20 inflation target as well as those for 2018-19, ignoring by and large the inflationary impact of the budget. The committee unanimously voted to shift its stance to ‘neutral’ from ‘calibrated tightening’ “as long as the inflation outlook remains benign".

In shifting its stance, the central bank’s six-member committee sharply cut inflation estimates for the first half (April-September) of the next fiscal year to 3.2%-3.4% from its earlier target of 3.8-4.2%.

The committee today cut the policy interest rate, the repo rate, by 25 basis points to 6.25%, driven by persistently low headline inflation. The MPC is mandated to target headline inflation based on the consumer price index (retail inflation) and that fell to an 18-month low of 2.19% in December, staying below the medium-term target of 4% for five consecutive months.

The central bank committee also decided to stick to the Central Statistical Organization’s growth estimate of 7.4% for 2019-20 and a range of 7.2%-7.4% for the first half of the next fiscal year.

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The committee ignored the inflationary impact of the interim budget, choosing to not look at many off-balance sheet items even as RBI Governor Shaktikanta Das told mediapersons that the bank would always be data-driven. He said the bank was keeping an eye on GST collections and these should pick up because bottlenecks had been cleared.

According to the budget, the government has slipped on its fiscal deficit target for the second year in a row and the next financial year, too, won’t see any fiscal consolidation. The 2018-19 number slipped by 10 basis points to 3.4% after revision and is projected to stay the same in the next 12-month period starting April.