Active Stocks
Tue Mar 19 2024 13:21:10
  1. Tata Consultancy Services share price
  2. 4,013.45 -3.17%
  1. Tata Steel share price
  2. 149.80 0.13%
  1. Bharti Airtel share price
  2. 1,232.00 0.57%
  1. Power Grid Corporation Of India share price
  2. 259.75 -1.98%
  1. ITC share price
  2. 409.65 -1.86%
Business News/ Politics / Policy/  RBI surprises, keeps policy rate unchanged
BackBack

RBI surprises, keeps policy rate unchanged

RBI's monetary policy committee says need more time to evaluate demonetisation impact

RBI’s repo rate, which is the policy rate now, stands at 6.25%. Photo: Aniruddha Chowdhury/MintPremium
RBI’s repo rate, which is the policy rate now, stands at 6.25%. Photo: Aniruddha Chowdhury/Mint

Mumbai: The monetary policy committee of the Reserve Bank of India (RBI) chose to overlook, for the time being, the effects of demonetisation as it voted unanimously—and unexpectedly—to leave the key policy rate unchanged.

The six-member panel said it needed more data to evaluate the long-term impact of currency replacement and also cited inflation risks. It also cut its gross value added (GVA) growth estimate for the current fiscal year by 50 basis points (bps) to 7.1%. A basis point is one-hundredth of a percentage point.

The panel headed by governor Urjit Patel chose to err on the side of caution in the belief that monetary policy should not react to short-term developments that influence the outlook disproportionately.

ALSO READ | Why RBI didn’t cut the policy rate

It did, however, say that the demonetisation of high-value banknotes will shave 10-15bps off the inflation rate in the third quarter of the current fiscal. The policy stance remains accommodative, meaning that there might be a rate cut in the February meeting.

That said, the central bank pointed out that upside risks to inflation still remain, albeit lower than projected in the October policy review. Thus, the inflation target for March remains unchanged at 5%, key risks being a surge in crude oil prices, financial market volatility and the impact of house rental allowances under the 7th Pay Commission award.

ALSO READ | RBI prefers to wait and watch impact of demonetisation

That call goes against market wisdom. Eleven of 14 economists and bankers surveyed by Mint expected RBI to reduce the benchmark rate by 25bps at the policy review. One expected a sharper 50bps rate cut. The repo rate, the signalling rate at which RBI infuses liquidity into the banking system, stands at 6.25%.

Economists believed space for more rate cuts had em­erged because of an expected fall in inflation due to subdued consumption dem­and. Retail inflation slowed to a 14-month low of 4.2% in October. But it clearly wasn’t enough.

“Despite the surprise today, we believe the RBI’s decision to stand pat is a prudent one. We also expect demonetisation to hurt short-term activity, but we do not see any medium-term damage as it will only result in wealth redistribution, and not much wealth destruction," said Sonal Verma, chief India economist at Nomura Global Markets Research.

The monetary policy committee said the rise in prices of several items has been masked by base effects in October. While discretionary spending on goods could have been affected by restricted access to cash, the prices of these items may weather these transitory effects as they are normally revised according to preset cycles, it added. The panel also expects the base effects to reverse and turn unfavourable in December and February.

The panel also noted that the monetary policy is set against a backdrop of heightened uncertainty. “Global developments, especially as financial markets factor in the future stance of US monetary and fiscal policy, could impart volatility to the exchange rate, thereby feeding into inflation," the resolution said.

Although it hit a one-month high on Wednesday, the rupee has lost 1.5% against the dollar since 8 November, when the demonetisation was annou­nced. Foreign investors have sold $5.36 billion in debt and $2.75 billion in equities since then also because of rising US yields on the back of Donald Trump’s win in the US elections and expectations of a Federal Reserve rate hike.

“While we still think that there could be a last 25bps cut remaining, probability of it being delivered in February may be low as assessment of the overall implications of demonetisation might still not be clear," said Indranil Pan, chief economist, IDFC Bank.

Incidentally, RBI attributed only 15bps of the 50bps reduction in the GVA estimate to demonetisation, saying the note withdrawal will travel through two major channels: short-run disruptions in cash-intensive sectors (retail trade, hospitality, transportation, etc.) and the unorganized sector; and demand compression from adverse wealth effects. It noted that GVA growth in the September quarter was lower than projected on account of a deeper-than-expected slowdown in industrial activity.

Separately, RBI also withdrew from 10 December the temporary cash reserve ratio of 100% imposed on incremental deposits. The liquidity released by the move would be absorbed by a mix of market stabilization scheme issuances and liquidity adjustment facility operations, RBI said.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

ABOUT THE AUTHOR
Gopika Gopakumar
Gopika Gopakumar has worked for over 15 years as a banking journalist across print and television media. Her expertise lies in breaking big corporate stories and producing news based TV shows. She was part of the 2013 IMF Journalism Fellowship Program where she covered the Annual & Spring meetings of the International Monetary Fund in Washington D.C. She started her career with CNBC-TV18, where she also produced a news feature show called Indianomics and an award winning show on business stories from South India called Up South. She joined Mint in 2016.
Catch all the Politics News and Updates on Live Mint. Download The Mint News App to get Daily Market Updates & Live Business News.
More Less
Published: 07 Dec 2016, 02:35 PM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App