Reserve Bank of India (RBI) on Wednesday unexpectedly kept interest rate unchanged despite calls for lowering it while it slashed the economic growth projection by half a per cent to 7.1 in the first policy review post demonetisation.
Announcing the fifth bi-monthly monetary policy review of the current fiscal, RBI Governor Urjit Patel also said demonetisation was not done in haste and efforts were being made to increase the supply of currency notes and appealed to the public not to hoard them.
Acknowledging that supply disruptions against the backdrop of currency replacement may drag down growth this year in India, he said short-term developments that influence the outlook disproportionately warrant caution with respect to setting the monetary policy stance.
“On balance, therefore, it is prudent to wait and watch how these factors play out and impinge upon the outlook.
Accordingly, the policy repo rate has been kept on hold in this review, while retaining an accommodative policy stance,” RBI said.
Satisfied with the RBI decision to keep the repo (short term lending) rate unchanged at 6.25 per cent, decided unanimously by Patel-led 6-member Monetary Policy Committee, the Finance Ministry described it as a “bold and brilliant” move which will prevent flight of overseas capital in uncertain global environment.
In its last review, which was first under Patel, the MPC had lowered the rate by 0.25 per cent.
India Inc, which was hoping for a 0.5 per cent cut in interest rate on account of surge in bank deposit following demonetisation, expressed disappointment saying RBI should cut the rate to support growth of trade and industry hit by demonetisation.
Bankers felt that there could be easing of interest rate in the days to come with RBI deciding to remove the incremental Cash Reserve Ratio (CRR) of 100 per cent from December 10.
“The combination of removal of incremental CRR limit and MSS (market stabilisation scheme) will help banks to manage their liquidity conditions better and bring financial stability to the system,” SBI Chairperson Arundhati Bhattacharya said.
The Reserve Bank projected the headline inflation at 5 per cent by the fourth quarter of 2016-17 with risks tilted to the upside, but lower than in the October policy review.
The fuller effects of the house rent allowance under the Seventh Pay Commission award are yet to be assessed, pending implementation, and have not been reckoned in this baseline inflation path, RBI said.
On demonetisation, it said the withdrawal of old high value currency notes could transiently interrupt some part of industrial activity in November-December due to delays in payments of wages and purchases of inputs, although a fuller assessment is awaited.
The central bank also said that almost Rs 12 lakh crore out of total Rs 14.5 lakh crore in scrapped notes have already been deposited in banks. .