RBI Keeps Repo Rate Unchanged At 6.25%; Withdraws Incremental CRR Requirement

The Reserve Bank of India on Wednesday surprised the markets by keeping its policy rate unchanged while citing global volatility and inflation risks as the reasons behind the decision. Following the review, the benchmark repo rate stands unchanged at 6.25 percent while the reverse repo rate stands at 5.75 percent.

All six members of the monetary policy committee voted in favour of holding rates.

The central bank has withdrawn, effective December 10, the incremental cash reserve ratio of 100 percent imposed on deposits between September 16 and November 11. The liquidity released by the discontinuation of incremental CRR would be absorbed by a mix of MSS issuances and liquidity adjustment facility operations, the RBI said in its official statement.

“The decision of the MPC is consistent with an accommodative stance of monetary policy in consonance with the objective of achieving consumer price index inflation at 5 percent by Q4 of 2016-17 and the medium-term target of 4 percent within a band of +/- 2 percent, while supporting growth,” said the RBI.

The decision to keep rates steady came despite the likely hit to growth from the withdrawal of Rs 500 and Rs 1000 notes, which has left the economy grappling with a currency crunch. The RBI pegged down its growth estimates marginally to 7.1 percent for the current fiscal compared to 7.6 percent earlier but gave no other clear indication of the impact of demonetisation on the economy.

The central bank, however, said that it expects the impact of demonetisation to be transient.

“The withdrawal of specified bank notes could transiently interrupt some part of industrial activity in November-December due to delays in payments of wages and purchases of inputs, although a fuller assessment is awaited. In the services sector, the outlook is mixed with construction, trade, transport, hotels and communication impacted by temporary SBN (specified bank notes) effects, while public administration, defence and other services would continue to be buoyed by the 7th Central Pay Commission (CPC) award and one rank one pension (OROP),” said the RBI.

While the hit to demand, as a result of demonetisation, is expected to bring down inflation, the RBI cited upside risks to prices emerging from a jump in oil prices. The central bank also cited volatility in global bond markets where yields have risen in anticipation of an interest rate hike from the US Federal Reserve.

“The withdrawal of SBNs (specified bank notes) could result in a possible temporary reduction in inflation of the order of 10-15 basis points in Q3. Taking these factors into account, headline inflation is projected at 5 percent in Q4 of 2016-17 with risks tilted to the upside but lower than in the October policy review,” said the RBI.

RBI On Demonetisation

RBI said the demonetisation decision was not taken in haste but after detailed deliberation. Rs 4 lakh crore worth of currency notes have been supplied after November 10, the central bank said, including 1,900 crore lower-denomination bank notes.

As much as Rs 11.55 lakh crore worth of old currency notes have been deposited in the system, Governor Urjit Patel said at the media briefing.

The withdrawal of currency will have no impact on the RBI’s balance sheet, and hence there is no occasion for a special dividend, RBI Deputy Governor R Gandhi added.