RBI governor Urjit Patel and MPC shocked analysts and markets by keeping the repo rate unchanged at 6.25%. “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,” the policy statement said. Six members voted in favour of the monetary policy decision.
The move not to cut repo rate comes as a big surprise since most economists were of the view that post demonetisation, RBI would be compelled to cut rates. This is the first monetary policy review after Modi government’s demonetisation step and the fifth bi-monthly monetary policy statement for 2016-17. The decision comes at a time when India’s GDP grew at 7.2% versus 7.6% YoY in the second quarter of the current financial year. The Narendra Modi government on November 8 announced that all old Rs 500 and Rs 1000 notes will cease to legal tender money. The move was aimed at rendering black money useless. However, with a huge amount of money being withdrawn from circulation, there is a near-unanimous view that the short-term impact on growth would be harmful.
RBI on its part has said that there are upside risks to inflation. “The Committee took note of the upturn in the prices of several items that is masked by the easing of inflation on base effects during October,” the statement said. “With the OPEC’s agreement to cut production, crude prices may firm up in the coming months. 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,” RBI and MPC said. ” Another disconcerting feature of recent developments is the downward inflexibility in inflation excluding food and fuel which could set a resistance level for future downward movements in the headline,” RBI cautioned. Moreover, volatility in crude prices and the surge in financial market turbulence could put the inflation target for Q4 of 2016-17 at some risk, it adds.