The Reserve Bank of India has kept the repo rate unchanged at 6.25% on Wednesday despite falling inflation and expectations that there will be a rate cut to stimulate Asia’s third largest economy as it limps back to normalcy after a crippling note ban.
The monetary policy committee has changed its stance on monetary easing from accommodative to neutral, suggesting a hawkish outlook. “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,” said the MPC report.
In a survey conducted by Bloomberg, 34 of 39 economists expected a 25 bps cut. Five economists expected no change.
Easing inflation and pressure to revive comatose consumer demand after Prime Minister Narendra Modi’s shock 500 and 1,000-rupee note ban in November raised expectations that RBI Governor Urjit Patel would lower rates.
Retail inflation slumped to a two-year low to 3.41 percent in December. RBI wants to keep retail inflation below 5 percent by March end.
Finance Minister Arun Jaitley’s largely conservative fiscal deficit target of 3.2 percent for the financial year 2017-18 announced in last week’s budget was expected to give the RBI’s six-member monetary policy committee the confidence to continue with an accommodative stance.
Market participants are seeking greater clarity from the RBI governor on the full impact of demonetisation on the economy and any upside risks to inflation.
One basis point is a hundredth of a percentage point. The repo is the rate at which banks borrow from the RBI.