Despite the possibility of growth being impacted due to the crippling cash crunch since the currency ban, the Reserve Bank of India (RBI) on Wednesday left the main repo interest rate unchanged at 6.25 per cent, to keep inflation in check.
The repo rate is the interest rate at which the RBI lends to banks. Most analysts expected a rate cut of 25 basis points to 6 per cent. (100 bps equals one percentage point.)
However, banks got a major liquidity boost with the central bank withdrawing the 100% incremental cash reserve ratio (CRR) requirement which was imposed on November 26. The RBI also forecast inflation to be around 5% for the fourth quarter of FY17 stating that some of the price reduction resulting out of demonetisation could be temporary.
A cut in the repo rate would have ideally brought down banks’ borrowing costs, eventually leading to lower loan rates for companies and individuals.
Therefore, it was expected to help revive private investments in an atmosphere where short-term growth is likely to be impacted. Still, lending rates may yet come down as the withdrawal of the additional cash reserve ratio requirement will bring down the cost of funds for banks.
The RBI clearly is playing the long game by targetting inflation instead of taking measures to address the short-term impact on GDP due to the scrapping of high value notes. And leaving the repo rate unchanged has nothing to do with the forthcoming US Federal Reserve decision, RBI said.
“The decision of the Monetary Policy Committee is consistent with an accommodative stance of monetary policy in consonance with the objective of achieving consumer price index inflation at 5 per cent by Q4 of 2016-17 and the medium-term target of 4 per cent within a band of 2 per cent, while supporting growth,”the RBI said. However, it added that the recent rise in crude oil prices presents an upside risk to the 5 percent inflation target for March 2017.
“The inflation outcome in September and October vindicates (our) current stance,” said RBI governor Urjit Patel.
The RBI on Wednesday also lowered the GDP growth estimate to 7.1 per cent in 2016-17 from the earlier projection of 7.6 per cent, likely.
The announcement that there would not be rate cut came after the first monetary policy review since the Centre scrapped high-denomination notes on November 8. And this is the second 2-day review since the Monetary Policy Committee (MPC), led by RBI governor Urjit Patel, was set up in September.