RBI decides to remain cautious, leaves rates unchanged.

In the sixth and final bimonthly monetary policy for 2016-17, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) changed its stance from accommodative to neutral. The policy rates, therefore, were kept unchanged. RBI decided to wait and assess how the transitory effect of demonetisation on inflation and output gap play out.
Deepak Talwar, Principal of DTA Consulting said, “A rate cut at this juncture would have perhaps acted merely as sentiment booster for investors but would not have been a necessary or sufficient incentive to turn more bullish than what it is now.”
“A rate cut would not have changed anything fundamentally for the borrowers,” said Mr. Talwar.
Interest rates, Deepak Talwar pointed out, have moved lower with banks passing on the benefits of previous rate cuts by RBI. “Flushed with funds after demonetisation”, said Principal of DTA Consulting, “banks reduced interest rates. RBI action on policy rate was, therefore, not expected.”
Repo rate, the key policy rate used by RBI, remains unchanged at 6.25%, Bank Rate and Marginal Standing Facility rates at 6.75%.
According to Deepak Talwar RBI was judicious in its assessment of the economy. Taking into account the short term problems the economy faced after demonetisation RBI reduced GVA growth forecast for fiscal 2016-17 to 6.9% , nearly one percent less than 7.8% predicted by India’s Central Statistics Office last year. However in view of the success in remonetising and keeping into account the pickup in manufacturing sector activity RBI predicted growth rate of 7.4% during 2017-18. “This is a fair assessment”, said Deepak Talwar.
MPC of RBI flagged certain issues for turning neutral from accommodative in its policy stance.
First and critical most is the fact that prices now remain sticky with further downward move click here looking unlikely. The lower food prices due to seasonal factors and also some distress sale of perishables due to demonetisation kept CPI at less than 5% for the quarter but this is not expected to last long.
Second, the global commodity prices are firming up due to expected boost of infra spending in USA and also reduction in oil production causing rise in crude prices. The Indian economy will face price pressure in coming months.
Third and no less critical is uncertain global scenario. The complex political development and protectionist tendencies seen might impact the Indian economy adversely. There may be pressure on rupee exchange rate also.
“RBI was justified in maintaining caution in view of these factors”, felt Talwar. “However for the Indian economy there are several positive factors as well”, said Principal of DTA Consulting.
The remonetisation process has put back liquidity to the consumers. This will increase discretionary spending. “Service sector which suffered due to demonetisation, will get boosted”, said Talwar.
Secondly demonetisation brought in liquidity to the banking system which made banks reduce lending rates. “What RBI rate cuts earlier could not do, demonetisation did at last”, commented Talwar.
Third and no less important is the Union Budget 2017-18 stepped up capital expenditure, provided support to affordable housing and also rural economy. The GVA in 2017-18 is expected to receive a boost. RBI predicted a 7.4% growth rate in the next financial year, 0.5% more than the estimated growth rate of 6.9% in 2016-17.
“Economy can no longer bank of monetary policy to stimulate growth. A lot will now depend on administrative efficiency and introduction of GST”, summed up Deepak Talwar.

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