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The Reserve Bank of India (RBI) kept the benchmark repo rate unchanged at the two-day bi-monthly policy decision, concluded Wednesday, based on an overall assessment of the macroeconomic conditions, with an objective of achieving stable consumer price inflation.
The RBI’s Monetary Policy Committee (MPC) decided to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.25 percent. Consequently, the reverse repo rate under the LAF remains unchanged at 5.75 percent, and the marginal standing facility (MSF) rate and the Bank Rate at 6.75 per cent.
The decision of the MPC remains consistent with the objective of achieving consumer price index (CPI) inflation at 5 percent by Q4 of 2016-17, while mainatining a medium-term target of 4 percent within a band of +/- 2 percent, while supporting growth.
Global economic growth picked up modestly in the H2 of 2016, after weakening in H1. Activity in developed economies bettered, led by a rebound in the US. Also, policy stimulus in China and some easing of stress in the larger commodity exporters shored up momentum, the central bank stated.
On the domestic front, the growth of real gross value added (GVA) in Q2 of 2016-17 turned out to be lower than projected on account of a deeper than expected slowdown in industrial activity. Manufacturing slowed down both sequentially and on an annual basis, with weak demand conditions and the firming up of input costs dragging down the profitability of corporations.
The committee, led by Governor Urjit Patel felt that the assessment is clouded by the still-unfolding effects of the withdrawal of specified bank notes (SBNs). Although housing and personal care inflation eased, the steady rise in inflation in respect of education, medical and health services, and transport and communication has imparted stickiness to inflation in this category.
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 which are still playing out. Six members voted in favour of the monetary policy decision, the committee added.
The minutes of the MPC’s meeting will be published on December 21, 2016. The next meeting of the MPC is scheduled to be held on February 7-8, 2017.
Meanwhile, the USD/INR is trading at 67.86, up 0.2 percent; the benchmark 30-share Sensex is down 0.63 percent to 26,226, while 50-share Nifty is down 0.47 percent to 8,125 at 9:20GMT.
