RBI Keeps Rates Unchanged: 5 Things You Need To Know

The Reserve Bank of India left the repo rate unchanged at 6.25 percent on Wednesday against market expectations signalling its focus to stick to its inflation target of 4 percent for the next financial year. Easing inflation and pressure to revive comatose consumer demand after Prime Minister Narendra Modi’s shock 500 and 1,000-rupee noteban in November raised expectations that RBI Governor Urjit Patel would lower rates. However, all six members of the monetary policy committee voted in favour of keeping rates unchanged.

Here are 5 things you need to know.

MPC changed its stance to neutral from accommodative: The monetary policy committee (MPC) decided to change its stance to neutral from accommodative. This the MPC says has been necessitated to assess how the transitory effects of demonetisation on inflation and the output gap play out.

Inflation: Retail inflation in Q4 of 2016-17 is likely to be below 5 percent. The RBI had set itself a target of 5 percent by March end. Inflation is expected to be around 4 to 4.5 percent in the first half of the next financial year and in the range of 4.5 to 5 percent in the second half. The central bank also outlined upside risks to inflation such as higher crude prices, exchange rate volatility and developments in global financial markets.

Demonetisation: RBI officials did not detail the impact of demonetisation on the economy. Deputy Governor Viral Acharya in a Q&A with reporters said the bank needed more data to assess whether the impact of demonetisation was transient.

High frequency indicators point to subdued activity in the services sector, particularly automobile sales across all segments, domestic air cargo, railway freight traffic, and cement production. Nevertheless, some areas stand out as bright spots, having weathered the transient effects of demonetisation – steel consumption; port traffic; international air freight; foreign tourist arrivals; tractor sales; and, cellular telephone subscribers, the report said.

Growth: Gross Value Added (GVA) growth for 2016-17 is estimated at 6.9 percent. Growth is expected to ‘recover sharply’ in 2017-18 as the effects of demonetisation ease and the government steps up capital expenditure contributing to growth.

Bank NPAs: Deputy Governor Viral Acharya said significant recapitalisation of banks, especially PSU banks was required and also speedy and efficient resolution of non-performing assets. The MPC says it believes that for improvement in the timely transmission of policy rates to banks lending rates, it is necessary that the banking sector’s nonperforming assets (NPAs) are resolved more quickly and efficiently.