Millennium Post

RBI keeps lending rates unchanged, lowers growth forecast

Patel-led 6-member Monetary Policy Committee, which had in its first policy review cut interest rate by 0.25 per cent in October, belied expectations to keep benchmark repo rate unchanged at 6.25 per cent unanimously.

In view of disruption in economic activities due to demonetisation, RBI lowered growth forecast from 7.6 per cent to 7.1 per cent for the current fiscal. 

The Reserve Bank of India (RBI) on Wednesday kept its key lending rates unchanged and lowered the country's growth forecast citing global and local uncertainties.

The Monetary Policy Committee (MPC) of the RBI 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 to 6.25 per cent. 

The reverse repurchase rate automatically remained unchanged at 5.75 per cent.

The government constituted the new policy panel with the primary mandate of ensuring retail inflation of 4 per cent, plus or minus two percentage points.

The panel said in a statement that Wednesday's decision was consistent with an accommodative stance, with the objective of achieving the inflation target. 

All six members of the panel, chaired by RBI Governor Urjit Patel, 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 US interest rates and lower growth due to the demonetisation drive. 

The key policy rate was last reduced in October. At that time the central bank had cut its key lending rate by 25 basis points in the fourth monetary policy review during the current fiscal.

Besides, the RBI lowered the country's growth forecast for 2016-17 to 7.1 per cent from 7.6 per cent.

The panel pointed out that GVA (gross value added) growth for 2016-17 has been revised downwards after incorporating the expected loss of growth momentum in the third quarter (Q3) and waning effects of demonetisation in Q4 alongside the boost to consumption demand from higher agricultural output and the implementation of the 7th CPC (Central Pay Commission) award.

"The outlook for GVA growth for 2016-17 has turned uncertain after the unexpected loss of momentum by 50 basis points in Q2 and the effects of the withdrawal of SBNs (specified bank notes) which are still playing out," the MPC said. 

The central bank said that the downside risks in the near term could come through two major channels -- short-run disruptions in economic activity in cash-intensive sectors and aggregate demand compression associated with adverse wealth effects. 

"The impact of the first channel should, however, ebb with the progressive increase in the circulation of new currency notes and greater usage of non-cash based payment instruments in the economy," the statement said. 

"While the impact of the second channel is likely to be limited. In October 2016, GVA growth in H2 was projected at 7.7 per cent and for the full year at 7.6 per cent." 

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