RBI unexpectedly leaves rates unchanged, slashes growth outlook

The Reserve Bank of India's (RBI) monetary policy committee, headed by Governor Urjit Patel, unexpectedly left the main interest rate unchanged at 6.25 percent. The RBI lowered GDP growth forecast for this fiscal to 6.9 percent and said it expects rebound to 7.4 percent next year.

The central bank's neutral stance amid cash crunch post demonetisation has taken markets by surprise. Markets largely expected the RBI to act by cutting its main rate by at least 0.25 percentage point to mitigate the impact of the cash crunch that is gripping the country.

“International financial markets were strongly impacted by the result of the U.S. presidential election and incoming data that raised the probability of the Federal Reserve tightening monetary policy,” the RBI said in a news release post decision.

The central bank said surplus liquidity is likely to fall with progressive remonetisation. It added that abundant liquidity with banks may persist into early months of FY18. The central bank is aiming to target consumer price index (CPI) 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.

India's benchmark Sensex and Nifty50 tanked over half a per cent in knee-jerk reaction to the announcement. USD/INR spiked to highs of 67.39 before edging lower to 67.26 and was trading at 67.30 at the time of writing.