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.
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.