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Rate pause season gets longer; RBI weighs risks

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The six- member monetary policy committee (MPC) kept the Reserve Bank of India’s policy rates unchanged on Wednesday. And, shifted the policy stance to “neutral” from “accommodative”,as it wanted to keep the flexibility to move either side,hike or cut, considering the uncertain inflation landscape.
 
Bond markets were shocked by the pause and change in policy stance.Yields on the 10 - year government security jumped 32 basis points (bps) to close at 6.75 percent,the steepest climb in a day since September 29, 2013.

According to credit rating agency CRISIL, the shift could “very well mark the end of the current rate cut cycle, which began in January 2015 — atleast in the near term.” Business chamber Ficci said a cut would have given a push to demand,which has been hit by demonetisation.

Following RBI’s sixth bi monthly monetary policy review and the last for the financial year,at which all the six members voted in favour of a pause, the repo rate remained unchanged at 6.25 percent.

“The MPC was fully cognisant of the lags to which monetary policy typically operates.It was also sensitive to the need for a calibrated target, there by minimising the collateral costs of achieving it.Therefore, it decided to shift the stance of monetary policy from accommodative to natural,to give sufficient flexibility to move in either direction, ”RBI Governor Urjit Patel said. 

KEY TAKE AWAYS 

Interest rates: RBI keeps interest rates unchanged; shifts policy stance to “neutral” from “accommodative” 

Growth forecast: Lowered to 6.9% from 7.1% 

Inflation: Concerns on global uncertainty in fuel and metals. Expects CPI inflation of 4 - 4.5% in the first half of FY 18; 4.5-5% in the second half 

Demonetisation impact: Transitory; growth to recover sharply in FY18. Remonetisationat Rs 9.92 lakh cr as on January 27

09TH, FEBRUARY, 2017, BUSINESS STANDARD, NEW-DELHI

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