The Reserve Bank of India kept its repo rate, popularly understood as short term lending rate unchanged at 6.25 per cent in its first monetary policy review after the demonetization.
Even as the decision to keep the repo rate—the rate at which the Central Bank provides short term lending to commercial banks— is in contrast to widespread expectation of an at least 0.25 per cent rate cut, it is a sensible fiscal measure to maintain status quo on the prevailing interest rates.
The RBI Governor Dr. Urjit Patel kept the key policy rates unchanged even as the central bank lowered the GDP growth rate forecast and hinted at short term disruptions in economic activities due to demonetisation.
All the six members of the Monetary Policy Committee (MPC) while voting in favour of the status-quo kept short term lending rates unchanged saying it is adopting a wait and watch policy to see the effects of withdrawal of 500 and 1000 rupee notes from circulation.
The while allaying fears of any adverse impact of apprehended cash shortage in the wake of withdrawal of old notes of Rs 500 and Rs 1000 denominations, the RBI said the impact of demonetisation should ebb with the progressive increase in the circulation of new currency notes and greater usage of non-cash based payment instruments in the economy.
Following are the highlights of RBI’s fifth bi-monthly monetary policy statement, 2016-17:
1. The RBI keeps repo rate unchanged at 6.25%, reverse repo at 5.75%.
2. The RBI leaves cash reserve ratio (CRR) unchanged at 4% but said it will withdraw the temporary 100% hike in the CRR announced late last month in the fortnight beginning 10 December.
3. The RBI cuts growth forecast to 7.1%, from 7.6% for this fiscal.
4. The RBI keeps the inflation target at 5% for March 2017, with upside risk.
5. The RBI said demonetisation will lower the prices of perishables, could reduce inflation by 10-15 basis points by December.
6. All the six members of the RBI panel voted to hold rates. Inflation could slow by 10-15 basis points in October-December due to the cash clampdown.
7. The RBI’s monetary policy statement said demonetisation will result in short-run disruptions in cash-intensive sectors.
8. RBI says crude price volatility, surge in financial market turbulence could put March-end inflation target at risk.
9. Foreign exchange reserve rose to all-time high of $364 billion on 2 December.
10.The RBI’s next monetary policy statement is on 8 February.