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RBI's monetary policy committee keeps repo rate unchanged at 6.25 per cent

The market, experts and research houses were all expecting a 25 basis points cut in the repo rate - at 6.25 per cent currently - in the RBI monetary policy today. The assumption was based on the fact that retail inflation had eased considerably since the last policy in December, 2016.

BT Online   New Delhi     Last Updated: February 8, 2017  | 16:01 IST
RBI keeps repo rate unchanged at 6.25 per cent

The Reserve Bank of India (RBI) on Wednesday kept its repo rate unchanged at 6.25 per cent against a widely-anticipated cut of 25 basis points.

"On the basis of an assessment of the current and evolving macroeconomic situation at its meeting today, the Monetary Policy Committee or MPC decided to keep the policy repo rate under the liquidity adjustment facility or LAF unchanged at 6.25 per cent," RBI press statement said.

Consequently, the reverse repo rate under the LAF remains unchanged at 5.75 per cent, and the marginal standing facility or MSF rate and the Bank Rate at 6.75 per cent.

It further said: "The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving consumer price index or CPI inflation at 5 per cent by Q4 of 2016-17 and the medium-term target of 4 per cent within a band of +/- 2 per cent, while supporting growth."

In line with pace of remonetisation, the RBI has decided to enhance the withdrawal limit on saving accounts in two phases. From February 20, 2017 the limit on cash withdrawal will be enhanced to Rs 50,000 per week and from March 13, 2017, there will not be any limit on cash withdrawals, RBI said.

RBI Governor Urjit Patel said that there was still scope for lending rates of banks to come down. 

Here are RBI's Assessments

Global  growth  is  projected  to  pick  up  modestly  in  2017,  after  slowing  down  in  the year gone by. Advanced economies or AEs are expected to build upon the slow gathering of momentum that started  in  the  second  half  of  2016,  led  by  the  US  and  Japan.  However, uncertainty surrounds  the direction of US macroeconomic  policies with potential global spillovers. Growth prospects for emerging market economies or EMEs  are  also  expected to improve moderately, with recessionary conditions  ebbing  in  Russia  and  Brazil,  and  China stabilising on policy stimulus. Inflation is edging up on the back of rising energy prices and a mild firming  up  of  demand. However,  global  trade  remains  subdued due  to an increasing tendency towards  protectionist  policies and  heightened  political  tensions.  Furthermore, financial  conditions are  likely  to  tighten  as  central  banks  in  AEs  normalise  exceptional accommodation in monetary policy.


International   financial   markets turned   volatile   from   mid-January   on concerns regarding  the  'Brexit' roadmap and materialisation  of  expectations  about  economic  policies of  the  new US administration. Within  the  rising  profile  of  international  commodity  prices, crude  oil  prices  firmed  up  with  the  OPEC's  agreement  to  curtail  production.  Prices  of  base metals have also increased on expectations of fiscal stimulus in the US, strong infrastructure spen ding   in   China,   and   supply reductions. Geopolitical   concerns   have   also   hardened commodity  prices.  More  recently,  the  appetite  for risk has  returned in  AEs,  buoying  equity markets and  hardening  bond  yields  as  a  response  to  the growing likelihood  of  further increases  in  the  Federal  Funds  rate  during  the  year.  Coupled  with  expectations  of  fiscal expansion in the US, this has propelled the US dollar to a multi -year high.

The Central  Statistics  Office  (CSO)  released  its advance  estimates  for  2016 -17  on January 6, plac ing India's real GVA growth at 7.0 per cent for  the  year,  down  from  7.8  per cent  (first  revised  estimates  released  on  January  31)  a  year  ago. Agriculture  and  allied activities posted  a  strong  pick-up, benefit ing  from  the  normal  south -west  monsoon,  robust expansion  in rabi acreage (higher  by  5.7 per  cent  over  the  preceding  year)  and  favourable base effects as well as the continuing resilience of allied activities. In contrast, t he industrial sector  experienced  a  sharp  deceleration,  mainly  due  to  a  slow down  in  manufacturing  and  in mining  and  quarrying.  Service  sector  activity  also  lost  pace,  concentrated  in  trade,  hotels, transport and communication services, and construction, cushioned to some extent by public administration and defence.

Industr ial out put measured by the index of industrial production (IIP) finally shrugged off the debilitating drag from insulated rubber cables from November and was also pushed up by a favourable base effect. In December, the output of core industries accelerated on a y ear -on-year as well as on a sequentially seasonally adjusted basis. The drivers of the upturn were steel  production  and  petroleum  refinery  throughput,  the  former, inter  alia,   supported  by import  tariff  safeguards  and  the  latter  buoyed  by  external  demand.  T he  acceleration  in  coal production and thermal electricity generation since November after three consecutive months of  contraction augur  well  for  the  outlook  for  power.  Reflecting  these  developments,  the manufacturing purchasing managers' index (PMI) retur ned to expansion mode in January on the back of growth of new orders and output, and the future output index has risen strongly. On  the  other  hand,  the  76 th round  of  the  Reserve  Bank's  industrial  outlook  survey  suggests that  financing  conditions  facing  the manufacturing  sector  have  worsened  in  Q3  of  2016-17 and are expected to remain tight in Q4. This is corroborated by the sharp slow down in bank credit to industry and continuing sluggishness in the investment climate in some sectors.

High frequency indicat ors point to subdued activity in the services sector, particularly automobile sales across all segments, domestic air cargo, railway freight traffic,  and cement production. Nevertheless, some areas stand out as bright spots, having weathered the transient effects  of  demonetisation  - steel  consumption;  port  traffic;  international  air  freight;  foreign tourist  arrivals;  tractor  sales ;  and, cellular  telephone  subscribers.  The  services  PMI  for January  2017  remained  in  retrenchment,  but  the  fall  in  output  was  the least  in  the  current phase of three consecutive months of contraction.

Marking  the  fifth  consecutive  month  of  softening,  retail  inflation  measured  by  the headline  consumer  price  index  (CPI)  turned  down  sharper  than  expected  in  December  and reached  its  lo west  reading  since  November  2014.    This  outcome  was  driven  by  deflation  in the  prices  of  vegetables and  pulses. Some  moderation  in  the  rate  of  increase  in  prices  of protein -rich items - eggs, meat and fish - also aided the downturn in food inflation.

Excluding food and fuel, inflation   has   been   unyielding   at   4.9   per   cent   since September.  While  some  part  of  this  inertial  behaviour  is  attributable  to  the  turnaround  in international crude prices since October - which fed into prices of petrol and diesel embedded in  transport  and  communication - a  broad -based  stickin ess  is  discernible  in  inflation, particularly in housing, health, education, personal care and effects (excluding gold and silver) as well as miscellaneous goods and services consumed by households.

The  large  overhang  of  liquidity  consequent  upon  demonetisation  weighed  on  money markets  in  December,  but  from  mid-January rebalancing  has  been  underway  with expansion of currency in circulation and new bank notes being injected into the system at an accel erated pace.  Throughout  this  period,  the  Reserve  Bank's  market  operations  have  been  in  liquidity absorption mode. With the abolition of the incremental cash reserve ratio from December 10, liquidity management operations have consisted of variable rate reverse repos under the LAF of tenors ranging from overnight to 91 days and auctions of cash management bills under the market  stabilisation  scheme  (MSS)  of  tenors  ranging  from  14  to  63  days.  The  average  daily net absorption  under  the  LAF  was Rs  1.6  trillion  in December, Rs  2.0 trillion  in  January  and Rs  3.7 trillion  in  February  (up to  Feb ruary 7) while  under  the  MSS,  it  was Rs  3.8  trillion, Rs  5.0 trillion and Rs  2.9 trillion,  respectively.  Money  market  rates  remained  aligned  with  the  policy repo rate albeit with a soft bias, with the weighted average call money rate (WACR) averaging 18 basis points below the policy rate during December and January.

Turning  to  the  external  sector,  export  growth  remained  in  the  positive  zone  for  the fourth month  in  succession  in  December. Imports other  than  petroleum  oil  and  lubricants (POL ) came out of the spike in Nov ember and moderated in December. In contrast, there was an increase of over 10 per cent in POL import s,   in part reflecting the rise in international crude oil prices. Overall, t he trade deficit shrank both sequentially and on a year -on-year basis, being lower for  the  period  April -December by  US$  23.5  billion  than its  level  a  year  ago.  On  the whole, the  current  account  deficit  is  likely  to  remain  muted  and  below  1  per  cent  of  GDP in 2016-17. While the buoyancy in net foreign direct investment was sustained, there have been portfolio   outflows   beginning   October   on   uncertainty   relating   to   the   direction   of   US macroeconomic policies and expectations of faster normalisation of US monetary policy in the year ahead. Foreign exchange reserves were at US$ 363.1 billion on February 3, 2017.



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