RBI keeps key rates unchanged, raises concerns about Brexit and uncertain US economic policy
The central bank took a cautious stance despite expectations of a cut.
The Reserve Bank of India on Wednesday kept the repo rate – the rate at which the RBI lends to commercial banks – unchanged at 6.25%. The repo rate helps control inflation, which is one of the central bank’s major concerns. The reverse repo rate was also maintained at 5.75% on Wednesday. The decision was made at the sixth bi-monthly meeting of the Monetary Policy Committee.
The bank said the move was consistent with the aim of “achieving Consumer Price Index inflation at 5% by Q4 of 2016-’17 and the medium-term target of 4% within a band of +/- 2%, while supporting growth.” It also attributed the cautious move to the “uncertainty” around “the direction of US macroeconomic policies with potential global spillovers”. The central bank further noted that there was uncertainty in global trade because of increasingly “protectionist policies” and political instability.
Demonetisation of Rs 500 and Rs 1,000 notes in November weighed on money markets in December, the bank noted. “But from mid-January rebalancing has been underway with expansion of currency in circulation and new bank notes being injected into the system at an accelerated pace,” the RBI said.
The bank last cut its repo rate in October 2016, bringing it down by 25 basis points (or 0.25%) to 6.25%. A Reuters poll in October had found that the RBI was expected to cut its interest rates to 6.0% in early 2017 on the back of low inflation in the near-term. The poll, conducted before the demonetisation of around 86% of India’s liquidity, had projected the country’s gross domestic product to grow by 7.7% for the 2016-’17 financial year. The RBI was also expected to hold rates for at least 12 months after the expected cut.
After its review meeting on December 7, 2016, the Monetary Policy Committee kept the repo rate unchanged at 6.25% because of factors such as the impact of presidential elections in the United States and domestic financial concerns. “The decision of the MPC is consistent with...the objective of achieving Consumer Price Index inflation of 5% by Q4 of 2016-’17 and the medium-term target of 4%,” the RBI had said in a statement.
