In a surprise move, the Monetary Policy Committee on Wednesday kept the Reserve Bank of India’s repo rate – the rate at which the central bank lends to commercial banks – unchanged, after a two-day review meeting. The key rate, which helps control inflation, was maintained at 6.25% under the liquidity assessment facility, the RBI said. The reverse repo rate, which banks use to charge the RBI, was also kept unchanged at 5.75%.
The liquidity assessment facility is a monetary policy tool that allows banks to borrow money through repurchase agreements. It is used to help banks adjust their day to day mismatches in liquidity.
“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 said in a statement. The decision was made taking into consideration a number of factors, including the modest global growth in the second quarter of the current financial year, the economic impacts of the United States presidential elections worldwide, as well as financial concerns at home, the RBI said.
The central bank has also lowered its gross domestic product growth estimate to 7.1% in 2016-’17 from its earlier projection of 7.6%. The Bombay Stock Exchange Sensex crashed by more than 100 points after the announcement, as economists had been expecting a rate cut.
This was RBI Governor Urjit Patel’s second time heading a review meeting. The top bank has also withdrawn the incremental cash reserve ratio of 100% it had imposed on banks on November 27 to tackle the “excess liquidity in the system” arising from the return of the demonetised Rs 500 and Rs 1,000 notes. CRR is the minimum amount of cash banks must park compulsorily with the central bank without earning any interest.
On the Centre’s move to scrap the high-denomination currency, Patel said a majority of the population believed that the move was a good decision to fight the circulation of fake currency, black money and funding of terrorist activities. Deputy RBI Governor RS Gandhi said that between November 10 and December 5, the central bank had released currency worth Rs 1,910 crore, which is more than that released in the past three years combined.
Old notes worth Rs 11.55 lakh crore had been exchanged with banks since the Centre’s demonetisation move, Gandhi added. “The demonetisation decision was not made in haste but after detailed deliberation. High-level secrecy had to be maintained,” the deputy governor said.
Most of the 60 analysts surveyed by Reuters had forecast that the central bank would slash its repo rate by 25 basis points down to 6%, the lowest since November 2010. Six of the analysts had predicted a more drastic decline of 50 basis points.
The RBI and Patel had been pressured to introduce measures to offset the restrictions from the demonetisation drive. Demonetisation of Rs 500 and Rs 1,000 notes was imposed on November 8, in an attempt to crackdown on black money. Data has indicated that the campaign has led to a decline in auto sales, and the service sector has seen its first contraction in the last one-and-a-half-years, according to Reuters.
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