It was a given – 25 bps rate cut and Shaktikanta Das threw a googly once again by taking a pause. Once he made everyone sit up and take notice with an odd 35bps rate and today, no rate cut when it was almost for certain that rate will be cut to spike up growth. 135 rate cuts back-to-back in 5 consecutive policies – so it’s not exactly sacrilege if RBI decided to take a pause – that’s probably the way we need to look at this.

With transmission not happening as much as the rate cuts given by RBI, maybe this pause, with growth lagging, might actually see banks act. RBI’s message is clear – we are not going to do anything more to prop up growth as it’s clearly not helping; the ball is now in the Govt’s court to correct the deep-rooted systemic and structural issues.

RBI has sent the message clearly across that rate cuts could happen in the future and we could see rates going down in 2020 again. It maintains its accommodative stance though it has cut the GDP forecast and raised the inflation target.

Many had widely expected that we could see a USA action like Quantitative Easing (QE) or Troubled Asset Relief Program (TARP) as it is now becoming more and more evident that rate cuts alone are not helping; some stronger measures are required. But there is no hint about a QE or TARP.

Highlights of the policy:

• Keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 5.15 per cent.
• Reverse repo rate under the LAF remains unchanged at 4.90 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 5.40 per cent.
• There is monetary policy space for future action.
• Given the evolving growth-inflation dynamics, the MPC felt it appropriate to take a pause at this juncture.
• To continue with the accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target.
• CPI inflation projection is revised upwards to 5.1-4.7 per cent for H2:2019-20 and 4.0-3.8 per cent for H1:2020-21, with risks broadly balanced.
• Real GDP growth for 2019-20 is revised downwards from 6.1 per cent in the October policy to 5.0 per cent – 4.9-5.5 per cent in H2 and 5.9-6.3 per cent for H1:2020-21
• Economic activity has weakened further and the output gap remains negative
• Manufacturing firms polled in the industrial outlook survey of the Reserve Bank expect (i) weak demand conditions and reduced input price pressures in Q3:2019-20 and Q4; and (ii) muted output prices reflecting further weakening of pricing power
• The next meeting of the MPC is scheduled during February 4-6, 2020.

The Govt is trying to put in place a growth package and what is needed more than liquidity, right now, is that all regulatory impediments are overcome and projects start getting off the ground. There is excessive focus on repo rates and this seems misplaced at the moment as even a 50 bps rate cut would be more about sentiments but the real change will happen only when projects take off and confidence is restored. The economy will take its own course and softening of interest rate is a given but the Govt needs to work overtime to push growth – a QE, or TARP or reduction in individual income tax is what will boost spirits. To shore up revenue if GST is hiked again, it will only go on to further dampen moods.

Monetary policy action cannot give impetus to growth; it needs to be supported by removal of supply structural bottlenecks and making investment environment more conducive. Today’s status quo puts the onus back on the Govt, which is how it has to be.