Repo rate left untouched on upside risks to inflation.
The future looks rosy. That was the message from Reserve Bank of India (RBI) Governor Urjit Patel. Even as he cut the growth forecast to 6.9 percent for the current fiscal from the earlier estimate of 7.1 percent, the residing deity at Mint Road said the economy will spring back to grow at 7.4 percent next fiscal (2017-18).
Mint Road also left the repo rate untouched at 6.25 percent contrary to market expectations of a 25 basis points cut in the same. The reason -- inflation moved southwards largely because of lower food prices; there were still upside risks due to higher oil prices, a volatile exchange rate and the effects of housing rent allowances under the Seventh Pay Commission.
Mint Road’s positive outlook for the fiscal ahead is based on a bounce back in discretionary consumer spends held back by demonetisation. It bet that economic activity in cash-intensive sectors -- retail trade, hotels and restaurants, and transportation and unorganised sector – will be rapidly restored. The liquidity influx due to demonetisation has led to a reduction in bank lending rates; and an improvement in transmission of past policy rate reductions when banks did not cut rates. Plus the emphasis in the Union Budget on higher capital expenditure, rural economy and affordable housing will spur growth. “Accordingly, GVA growth for 2017-18 is projected at 7.4 percent, with risks evenly balanced,” RBI noted.
While it is speculated that the shift in RBI's stance to "neutral" from "accommodative" may lead to a cut in its key rates going ahead, you can't rule out a hike in the same if inflation rears its head again.
For now, we have something to cheer.