NEW DELHI: The Monetary Policy Committee (MPC) of the Reserve Bank of India shocked pundits and markets alike by deciding to keep benchmark policy rates unchanged despite the cash crunch following the demonetisation of high-value notes. The main consideration for the MPC to keep the status quo was that of the “heightened uncertainty” because of the risk of volatility in the capital markets due to domestic and geopolitical developments.
The RBI has also cut growth forecasts by 50 basis points, reducing Gross Value Added (GVA) forecast for the current fiscal year to 7.1 per cent from 7.6 per cent.
“The growth of real gross value added (GVA) in Q2 of 2016-17 turned out to be lower than projected on account of a deeper than expected slowdown in industrial activity… In October 2016, GVA growth in H2 was projected at 7.7 per cent and for the full year at 7.6 per cent. Incorporating the expected loss of growth momentum in Q3 and waning effects in Q4 alongside the boost to consumption demand from higher agricultural output and the implementation of the 7th CPC award, GVA growth for 2016-17 is revised down from 7.6 per cent to 7.1 per cent, with evenly balanced risks ,” the MPC said.
For now, the repo rate remains unchanged at 6.25 per cent, “Consequently, the reverse repo rate under the LAF remains unchanged at 5.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 6.75 per cent,” said the RBI in its statement. Most analysts and banking experts had expected a rate cut of at least 25 basis points.
“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 +/- 2 per cent, while supporting growth,” it added.
The RBI will withdraw the incremental cash reserve ratio (CRR) condition imposed on banks, on nearly Rs 3.24 lakh crore of deposits, from December 10.
“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,” pointed out the statement. Because, according to the RBI, if the impact of demonetisation is transient, growth would rebound strongly.
As for inflation, there was a downward inflexibility, excluding food and fuel, which could set a resistance level for future downward movements in the headline numbers, RBI said, adding that volatility in crude prices and market turbulence could put inflation target for the fourth quarter of 2016-17 at some risk.
“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 policy document said.
The unexpected decision took markets by surprise, with the benchmark Sensex shrugging off early gains to fall from 26,492.64 before the announcement to as low as 26,216.84 as of 3.25 pm. The broader Nifty also breached the 8,100 points mark to fall from 8,178.45 to 8,097.90.
However, the fall was plateauing as knee-jerk selling eased off after the press conference.
More highlights:
* Cash reserve ratio or CRR unchanged at 4%
* Inflation target remains 5% for March 2017, upside risk
* Demonetisation to lower prices of perishables, could reduce inflation by 10-15 basis points by December
* All MPC members voted in favour of status quo in policy
* Demonetisation to result in short-run disruptions in cash-intensive sectors
* Crude price volatility, surge in financial market turbulence could put March end inflation target at risk
* Foreign exchange reserve rose to all-time high of USD 364 billion on December 2
* RBI injected Rs 1.1 lakh crore liquidity through OMO purchases this fiscal
The next monetary policy is scheduled for February 8.