Business
Keeps repo rate unchanged at 6.25%; says data has been clouded after note ban and clear assessment is difficult
Updated : Mar 23, 2018, 03:11 AM IST
The Reserve Bank of India (RBI) has turned hawkish, shifting gears from an accommodative monetary policy to a neutral stand, signalling the bottom of the rate-easing cycle.
The six-member Monetary Policy Committee (MPC) took a unanimous decision to keep the repo rate static at 6.25%, belying the hopes of the market which was rallying for a 0.25% cut. Inflation targeting has become the focal point on the back of rising oil prices, the impact of the Seventh Pay Commission and an expectation in the reversal in the food prices.
Urjit Patel, RBI governor, said in a press conference after unveiling the policy statement that “data has been clouded” after demonetization, leading to difficulties in having a clear assessment of the macroeconomic situation post November 8.
He said, “The Monetary Policy Committee exercised abundant prudence in keeping the policy rates on hold while looking at these transient effects and awaited a clearer and unbiased assessment of inflation. The MPC is dedicated to achieving the 4% headline CPI inflation target while keeping in mind the objectives of growth.”
This is the third time that the MPC is giving a unanimous decision. The change in the stance led the bonds to crash.
While the rupee hit a 3-month high closing at Rs 67.19 to the dollar, the yields on the government securities rose by 0.30% to close at 6.74%, which led to losses for banks having huge stakes in the government securities market.
Treasury was one of the revenue generators in the absence of the good credit growth, but now that avenue seems to be closing in the crucial fourth quarter of the financial year when credit growth has been at an over-a-decade low, hovering around 5%.
Bankers and economists say it is too early to shift gears as the economic cost of demonetization is yet to be ascertained.
Due to favourable base effects and low consumption demand, MPC is expecting CPI inflation to go below 5% by March 2017.
Arundhati Bhattacharya, chairman, State Bank of India (SBI), said, “Given the general environment of uncertainty both domestically and abroad, the RBI decision is right to maintain status quo.”
The economic research report of SBI said, “The RBI assessment of the global situation is centered on three themes – the internal and external policies of the US administration, impact of Brexit and oil prices. This assessment is largely correct but it masks considerable risk that India faces. The outlook for the global growth rightly remains uncertain and unpredictable. In this backdrop, the present stance is appropriate as demonetization has led to considerable transmission of previous rate cuts and full impact of process of remonetization is still unclear.”
Abheek Barua, chief economist at HDFC Bank, said markets may have also read too much into the Trump rhetoric and now we need to make a clear distinction between posturing and actual policies.
He said in a release that even as the exchange rate risk and the impact of HRA allowances are possibly overstated in their view, it is the ‘core’ component of the retail index which could prevent inflation from falling substantially and has thus gathered the the maximum attention of the central bank.
On Wednesday, the rupee closed at a fresh three-month high at Rs 67.19 to the dollar, a level it had touched on November 10, 2016. The rupee opened at 67.37 a dollar and touched a high and a low of 67.19 and 67.38, respectively.