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  1. Modi’s demonetisation the reason why Urjit Patel-led RBI has changed credit policy stance from accommodative to neutral

Modi’s demonetisation the reason why Urjit Patel-led RBI has changed credit policy stance from accommodative to neutral

Narendra Modi government's demonetisation is the reason why RBI governor Urjit Patel-led MPC has kept the repo rate unchanged in the monetary policy review and changed its stance!

By: | Updated: February 8, 2017 3:27 PM
Narendra Modi, Urjit Patel Reading the fine print of the policy statement points to a simple reason for the RBI and MPC to change the credit policy stance: the transient effect of demonetisation.

Narendra Modi government’s demonetisation is the reason why RBI governor Urjit Patel-led MPC has kept the repo rate unchanged in the monetary policy review and changed its stance! In the latest monetary policy review of the central bank, the 6-member committee that decides on the key rates of the economy has changed its stance from “accommodative to neutral”. The reason cited for the move is demonetisation. The policy statement says, “The committee decided to change the stance from accommodative to neutral while keeping the policy rate on hold to assess how the transitory effects of demonetisation on inflation and the output gap play out.”

Reading the fine print of the policy statement points to a simple reason for the RBI and MPC to change the credit policy stance: the transient effect of demonetisation. According to the MPC, GDP growth will pick up in the coming months, but inflation will see multiple upside risks as well!

 

“The decline in headline CPI inflation in November and December has been larger than expected, but almost exclusively on the back of deflation in vegetables and pulses,” says RBI, but adds, “While the seasonal ebb in the prices of vegetables that usually occurs with the onset of winter as well as some demand compression may have contributed to this outcome, anecdotal evidence points to some distress sales of perishables having accentuated the decline in vegetable prices, with spillovers into January as well. Looking beyond, prices of pulses are likely to remain soft with comfortable supply conditions, while vegetable prices may potentially rebound as the effects of demonetisation wear off.”

According to RBI, headline CPI inflation in Q4 of 2016-17 is likely to be below 5%. “Favourable base effects and lagged effects of demand compression may mute headline inflation in Q1 of 2017-18. Thereafter, it is expected to pick up momentum, especially as growth picks up and the output gap narrows,” RBI cautions.

On the growth front, RBI and MPC expect growth is expected to recover sharply in 2017-18 on account of several factors. “First, discretionary consumer demand held back by demonetisation is expected to bounce back beginning in the closing months of 2016-17. Second, economic activity in cash-intensive sectors such as retail trade, hotels and restaurants, and transportation, as well as in the unorganised sector, is expected to be rapidly restored,” says RBI.

Also read: RBI keeps key policy rate unchanged, but expect your EMIs to come down further

Also, “demonetisation-induced ease in bank funding conditions has led to a sharp improvement in transmission of past policy rate reductions into marginal cost-based lending rates (MCLRs), and in turn, to lending rates for healthy borrowers, which should spur a pick-up in both consumption and investment demand,” predicts the policy. Additionally, MPC is of the view that the emphasis in the Union Budget for 2017-18 on stepping up capital expenditure, and boosting the rural economy and affordable housing should contribute to growth.

RBI’s sudden change in policy stance from accomodative to neutral has taken many by surprise. At a first glance, it appears that MPC expects inflation to come under pressure, while growth would shrug the transient effects of demonetisation and recover. While RBI’s prediction on GDP growth would bring comfort, its shift in stance to neutral implies that the Modi government can forget a rate cut for the next few months!

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  1. P
    P K
    Feb 8, 2017 at 9:27 am
    Post your opinion...as an entrepreneur frankly speaking customer flow is less resulting dull market condition.f eeling poor day by day due to demonetization...ufffff
    Reply

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