The Reserve Bank of India monetary policy committee (MPC) on Wednesday went against market expectations and kept repo rate unchanged at 6.25 per cent . The bank was widely expected to cut repo rate to 6 per cent to a six-year low since November 2010.
The decision of the MPC is consistent with an accommodative stance of monetary policy in consonance with the objective of achieving consumer price index (CPI) inflation at 5 per cent by Q4 of 2016-17 and the medium-term target of 4 per cent within a band of plus or minus 2 per cent, while supporting growth, the RBI said in a statement.
RBI on demonetisation:
- Demonetisation decision not taken in haste: RBI Deputy Governor R Gandhi
- There is adequate supply of notes, says RBI asking people not to hoard new currency; supplied Rs 4 lakh crore in new notes
- Incremental increase in CRR to be withdrawn from December 10: RBI
- The decision was not taken in haste but after due deliberations
- Central govt were conscious of difficulties to public at large
- Old notes amounting to 11.85 lakh crore have come back
- Withdrawal of legal tender character does not extinguish RBI balance sheets
- New notes will have enhanced security features. That will make it difficult to forge
- Transparency will improve
- Thrust on digitisation is taking place
- Cost of printing money, quantum of paper currency that RBI requires should come down
- Benefits area in medium and long terms
- Control on withdrawals will not be a permanent feature
- Most people seem to be saying that this was the good thing as this will stop terror financing, corruption etc
- Hoarding of notes helps nobody's cause. We advocate public to switch to digital mode of payments, said RBI deputy governor Rama Subramaniam Gandhi
The marginal standing facility (MSF) rate and the bank rate stand at 6.75 per cent.
This is the fifth bi-monthly monetary policy of the RBI and the second monetary policy statement after Urjit Patel took over as RBI Governor.
The RBI decision comes at a time when the nation is facing a cash crunch due to the government's demonetisation move.
Demonetisation was widely attributed as the main reason for expectations of a 25 bps repo rate cut.
The bank said, "In India, while supply disruptions in the backwash of currency replacement may drag down growth this year, it is important to analyse more information and experience before judging their full effects and their persistence - short-term developments that influence the outlook disproportionately warrant caution with respect to setting the monetary policy stance."
The note ban has affected corporate earnings in Q2 with FMCG, automobile, consumer durables and realty sectors taking the maximum hit post Modi government's move. Fitch Ratings, Deutsche Bank and Goldman Sachs lowered the country's GDP growth forecast due to disruptions felt in economic activity post demonetisation.
It was widely expected the RBI would cut rates as wholesale prices inflation fell for the second month in October as food articles, led by vegetables, saw softening of prices.
The WPI inflation fell to 3.39 per cent in October compared with 3.57 per cent in September. In October 2015, WPI inflation was (-) 3.70 per cent. Retail inflation too eased for a third straight month in October. Retail inflation for the month came at 4.20 per cent, a 14 month-low compared to 4.31 percent on a month-on-month basis.
But RBI cited sustained firmness and a pick-up in momentum in food prices other than vegetables.
In a statement, the apex bank said, "If the impact is transient as widely expected, growth should rebound strongly. Turning to inflation, food prices other than vegetables are exhibiting sustained firmness and a pick-up in momentum. Another disconcerting feature of recent developments is the downward inflexibility in inflation excluding food and fuel which could set a resistance level for future downward movements in the headline. Moreover, volatility in crude prices and the surge in financial market turbulence could put the inflation target of 4 percent for Q4 of 2016-17 at some risk. Given these indicators of underlying inflation, it is appropriate to look through the transitory but unclear effects of the withdrawal of SBNs while setting the monetary policy stance."
Decision by majority
All six members of the MPC voted in favour of the monetary policy decision.
"On balance, therefore, it is prudent to wait and watch how these factors play out and impinge upon the outlook. Accordingly, the policy repo rate has been kept on hold in this review, while retaining an accommodative policy stance. The minutes of the MPC's meeting will be published on December 21, 2016. The next meeting of the MPC is scheduled on February 7 and 8, 2017," the bank said.