In its first monetary policy review after demonetisation, the central bank left the Repo rate unchanged at 6.25%, and the Reverse Repo rate at 5.75%. The Cash Reserve Ratio, which currently stands at 4% was also left unchanged.
RBI also lowered India’s GDP growth rate for current fiscal to 7.1 per cent from 7.6 per cent. RBI said that it was because of short-term disruption in economic activity and also because of the demand compression that arose out of demonetisation that led to downside risks to growth.
Urijit Patel led 6-member Monetary Policy Committee had cut interest rate by 0.25 per cent in October earlier this year.
“Incorporating the expected loss of growth momentum in Q3 and waning effects in Q4 alongside the boost to consumption demand from higher agricultural output and the implementation of the 7th CPC award, GVA growth for 2016-17 is revised down from 7.6 per cent to 7.1 per cent, with evenly balanced risks,” the RBI said in the fifth bi-monthly Monetary Policy Statement for the current fiscal.
“The outlook for Gross Value Added (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 specified bank notes (SBNs) which are still playing out,” it added.
The RBI statement also said that demonetisation could lower prices of perishables and it could reduce inflation by 10-15 basis points by December.
According to the Monetary Policy Committee, the impact of demonetisation should ebb with the progressive increase in the circulation of new currency notes and greater usage of non-cash based payment instruments in the economy.
“It is appropriate to look through the transitory but unclear effects of the withdrawal of SBNs while 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,” the RBI said.
“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,” it added.
(With inputs from PTI)