Mumbai: The Reserve Bank of India (RBI) on Wednesday left its key policy rate unchanged as it tried to assess how the transitory effects of demonetisation on inflation and the output gap play out.
The repo rate, at which it infuses liquidity into the banking system and is the signalling rate now, stands at 6.25%. One basis point is one hundredth of a percentage point.
poll of 10 economists showed that seven participants expected RBI to cut rates by at least 25 bps. The remaining participants had said that they expected the central bank to hold rates in this policy and wait for more macroeconomic data to emerge in April.
“The Committee remains committed to bringing headline inflation closer to 4.0 percent on a durable basis and in a calibrated manner. This requires further significant decline in inflation expectations, especially since the services component of inflation that is sensitive to wage movements has been sticky,” said the monetary policy statement
The panel noted that significant upside risks to inflation still remain in the form of “the hardening profile of international crude prices; volatility in the exchange rate on account of global financial market developments, which could impart upside pressures to domestic inflation; and the fuller effects of the house rent allowances under the 7th Central Pay Commission (CPC) award which have not been factored in the baseline inflation path.”
Since the demonetisation drive ended on 30 December, most large banks have cut their marginal cost of funds-based lending rates (MCLR) with State Bank of India reducing rates by up to 90 bps. The bank rate cuts were supported by a large inflow of low cost deposits after the government invalidated Rs500 and Rs1,000 currency notes.
The panel noted that transmission can be improved further if the bad loan situation of Indian banks are resolved more quickly, there is better recapitalisation of banks and the formula for adjustments in the interest rates on small savings schemes to changes in government bond yields is fully implemented.
This was the third monetary policy that was announced after voting by the six-member monetary policy committee (MPC) which came in to existence in September. The committee includes the central bank chief Urjit Patel, deputy governor Viral Acharya, executive director Michael Patra and three government nominees which includes Chetan Ghate, Pami Dua and Ravindra Dholakia. This is Acharya’s first policy announcement as a deputy governor of the central bank.
According to the resolution note released by the RBI on its website, all the six members of the MPC voted to keep the rate unchanged.
The MPC’s decision to support growth comes from the comfort that consumer price inflation (CPI) is finally stabilising around the comfort zone after two months of consistent hardening.
Retail inflation decelerated to a two-year low of 3.41% in December from 3.63% the previous month as vegetable prices continued to fall. RBI is aiming to keep retail inflation under 5% in the fourth quarter and 4% within a band of 2 percentage points on either side in the medium term.
At 2.31pm, the rupee was trading at 67.36, up 0.08% from its previous close of 67.41. The 10-year benchmark bond yield was trading at 6.445% from its previous close of 6.431%. India’s benchmark Sensex fell 0.41% to 28,218.49 points.