No RBI repo rate cut despite growth fears amid notes ban

Mangalore Today News Network

Dec 07, 2016: The Reserve Bank of India (RBI) has kept its repo rate unchanged at 6.25 per cent in its first monetary policy review after the notes ban, surprising the street. Economists polled by NDTV Profit had expected a 0.25 per cent rate cut to support the economy, after the government’s notes ban has threatened to hit nearly every aspect of it from consumers to supply chains.

Acknowledging the threat to economic growth from notes ban, the RBI has cut its GDP forecast, slashing gross value added growth outlook to 7.1 per cent for FY17 from 7.6 per cent earlier.

Many brokerages have already downgraded their GDP growth outlook for the year. Prime Minister Narendra Modi stunned the country with a ban last month on 500 and 1000 rupee notes, removing 86 per cent of the currency in circulation, in a bid to crack down on black or untaxed money.  

Data so far shows the measure has hit the cash-reliant economy more than expected: auto sales plunged and services sector activity dived into contraction last month for the first time in over two years. Analysts have also downgraded their outlook for Indian stock markets because the currency ban is seen knocking economic growth in the next few quarters.

"We are certainly disappointed with the lack of clarity from the policy commentary on the impacts of demonetization," said Tirthankar Patnaik, India Strategist at Mizuho Bank. However, the RBI decision to keep rates unchanged "opens up room for a rate cut in February", he said.

All six monetary policy committee members, led by RBI chief Urjit Patel, voted for no change in rates. Stock markets have fallen sharply after RBI kept its rates unchanged. The Sensex was down over 150 points while Nifty was below 8,100.

However, in a positive move for the banking sector, the RBI has withdrawn incremental cash reserve ratio (CRR) of 100 per cent on deposits. In a temporary measure, the RBI had last month raised the cash reserve ratio for banks to 100 per cent of their deposits to absorb the liquidity being created from people depositing their old notes. CRR or cash reserve ratio is the minimum percentage of a bank’s deposits that has to be held in the form of cash. Banks don’t earn any interest on deposits kept aside for cash reserve ratio requirements.

The RBI chief Urjit Patel in his post-policy commentary cited risks to inflation from rising global crude prices and stickiness in some categories of inflation.