RBI keeps lending rates unchanged, lowers growth forecast (Roundup)

Mumbai, Dec 7 (IANS) In a surprise move, the Reserve Bank of India (RBI) on Wednesday kept its key lending rates unchanged, citing global and local uncertainties and also lowered the country’s growth forecast for 2016-17.

The RBI’s Monetary Policy Committee (MPC), during its second bi-monthly monetary policy review — the fifth of the fiscal — kept the repurchase rate, or the short-term lending rate it charges on borrowings by commercial banks, unchanged at 6.25 per cent.

The reverse repurchase rate automatically remained unchanged at 5.75 per cent. Most analysts and market experts had predicted a 25 basis point reduction. Some had said the RBI may go in for 50 basis point or a half per cent cut.

Among the two key instruments to check money flow, the cash reserve ratio (CRR), or the quantum of liquid funds which commercial banks have to keep, and the statutory liquidity ratio (SLR), or the value of specified securities which they have to subscribe to, were also left unaltered.

The current CRR is 4 per cent, while the SLR is 20.75 per cent.

However, the incremental CRR aimed at absorbing the surplus liquidity with banks post-demonetisation will be discontinued from the fortnight beginning December 10.

The RBI had earlier announced that banks would have to deposit with the RBI the incremental CRR of 100 per cent of the increase in net demand and time liabilities (NDTL) between September 16, 2016 and November 11, 2016. This decision had come into effect from November 26.

“MPC was of the view that given the 25 bps cut in October and a total of 125 bps since January 2015, a further cut was not warranted at this juncture,” RBI Governor Urjit Patel said at a press conference following the announcement of the monetary policy on the RBI website.

Patel said the committee felt it was important to achieve the 5 per cent consumer price index inflation target by March 2017.

All six members of the panel, chaired by the RBI Governor, voted in favour of the monetary policy decisions — the minutes of which will be released on December 21.

According to the panel, its decision to keep the key lending rates unchanged was taken after considering various global and local factors such as a likely hike in the US interest rates.

RBI also lowered the country’s growth forecast for 2016-17 to 7.1 per cent from 7.6 per cent.

“Incorporating the expected loss of growth momentum in Q3 and waning effects in Q4 alongside the boost to consumption demand from higher agricultural output and the implementation of the 7th Central Pay Commission award, gross value added (GVA) growth for 2016-17 is revised down from 7.6 per cent to 7.1 per cent, with evenly balanced risks,” the MPC said in its monetary policy statement.

RBI Deputy Governor S.S. Mundra said the impact of demonetisation on the gross domestic product (GDP) growth rate would “only be 15 basis points and it would be transitory”.

The sensitive index of the BSE, which was ruling at around 26,334.79 points just ahead of the RBI announcement, slipped to 26,255.88 points at around 2.30 p.m. — down 136.88 points or 0.52 per cent.

It closed the day’s trade down 155.89 points or 0.59 per cent at 26,392.76 points.

Similarly, the wider 51-scrip Nifty of the National Stock Exchange (NSE) ended the day’s trade lower by 41.10 points or 0.50 per cent to 8,102.05 points.

On demonetisation, the RBI said that almost 12 lakh crore demonetised Rs 500 and Rs 1,000 currency notes have been deposited in the banks by the public since the November 8 announcement and 19.1 billion notes of the new currency have been put into circulation.

The RBI monetary policy stance came as a surprise to the industry. “The decision of keeping the repo rate unchanged was a little surprising given that there has been sizeable demand-destruction. Probably, this may have happened due to considerations of possibilities of rise in energy prices as well as with an eye on Fed rate hike,” State Bank of India Chairman Arundhati Bhattacharya said.

Chief Economic Adviser Arvind Subramanian, however, termed the RBI monetary policy as “bold and brilliant, providing continuity and stability in times of domestic and international volatility”.

ICICI Bank CMD Chanda Kochhar said: “The RBI has maintained stability in monetary policy with a focus on the medium-term inflation targets being sustainably achieved. The policy has maintained an accommodative stance while taking into account global developments and domestic economic conditions.”

The Confederation of Real Estate Developers’ Associations of India (CREDAI) President Getamber Anand said: “It is unfortunate that the central bank left all policy rates unchanged today, we are still hopeful and understand that maybe the policy makers are waiting till December 31 to see the final outcome of demonetisation after which an aggressive announcement on rate cut will be made sooner than later.”

President of the Federation of Indian Chambers of Commerce and Industry (Ficci) Harshavardhan Neotia said the RBI’s stance in the monetary policy “belied the wide expectation of a rate cut. At this juncture, a 50 bps point cut in the repo rate would have provided the needed boost to the flagging industrial economy”.

Associated Chambers of Commerce and Industry of India (Assocham) President Sunil Kanoria said: “A cut in interest rate would not have made much of difference to the credit offtake in the midst of the industry being over-leveraged and the consumer demand remaining tepid because of scrapping of high-value currency notes.”

He said it was “apparent that all energies are being utilised to deal with the demonetisation issue and things can get clearer only after normalcy is restored by way of re-monetisation of the currency for the trade and industry to get back to shape”.

PwC India Partner Kuntal Sur said: “Global factors like stronger US dollar, possibilities of further rate hike by US Fed in December, hardening of oil prices internationally may have forced RBI to keep repo rate unchanged at 6.25 per cent.”

Anand Natarajan, head of Business Execution at Fullerton India Credit Company, said: “The RBI has rightfully kept the stance accommodative and ready for response, and has resisted knee-jerk policy actions.”