RBI holds its fire, repo rate unchanged at 6.25 pc

7th Dec 2016
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Cites inflationary pressures and demonetisation for policy stance.

The Reserve Bank of India (RBI) on Wednesday (Dec 7) held the repo rate constant at 6.25 percent, citing inflationary pressures and the impact of demonetisation for its stance.

While the general consensus in the financial market ahead of the policy review was that Mint Road would go in for a 25 basis point cut in its key rate, the voting pattern in the Monetary Policy Committee shows that six members voted in favour of the decision; the minutes will be published on December 21.

rbi

 A letdown

Two major factors that influenced Mint Road’s stance were the dip in consumer and investment spends due to the cash crunch and the outlook on the rupee’s value and inflation.

The MPC was of the view that while supply disruptions in the backwash of currency replacement may drag down growth this year, it is important to analyse more information and experience before judging their full effects and their persistence – short-term developments that influence the outlook disproportionately warrant caution with respect to setting the monetary policy stance. If the impact is transient, as widely expected, growth should rebound strongly.

On inflation, it was said that food prices -- other than vegetables -- are showing firmness, while another disconcerting feature is the downward inflexibility in inflation, excluding food and fuel, which could set a resistance level for future downward movements in headline inflation.

“Volatility in crude prices and the surge in financial market turbulence could put the inflation target for Q4 of 2016-17 at some risk. Given these indicators of underlying inflation, it is appropriate to look through the transitory but unclear effects of the withdrawal of SBNs (specified bank notes) while setting the monetary policy stance. On balance, therefore, it is prudent to wait and watch how these factors play out and impinge upon the outlook. Accordingly, the policy repo rate has been kept on hold in this review, while retaining an accommodative policy stance,” the RBI explained.

It seems that we have to grin and bear it for some time!

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