5 reasons why RBI kept the repo rate unchanged at 6.25%

The Reserve Bank of India (RBI) and the Monetary Policy Committee (MPC) kept the repo rate unchanged at 6.25%.

The fifth bi-monthly monetary policy kept the reverse repo rate unchanged at 5.75%.

The MPC maintained an accommodative stance with an objective of achieving the CPI inflation at 5% for Q4 2016-17.

The incremental CRR will be withdrawn from December 10.

Addressing a news conference, RBI Governor Urjit Patel said, “The MPC felt it is important to achieve 5% CPI inflation by March. The 7th Pay Commission disbursements may affect inflation in next financial year. Also, the incremental CRR was purely a temporary measure.”

He said the Fed had nothing to do with the status quo and given an October rate cut, a further cut was not warranted.

Here are 5 other reasons why the RBI kept the repo rate unchanged

1. Retail inflation: Retail inflation measured by CPI eased more than expected for the third consecutive month in October, driven down by a sharper than anticipated deflation in the prices of vegetables. In the fuel category, inflation eased with the decline in LPG prices on an annual basis and a fall in electricity prices from a month ago. Inflation excluding food and fuel continues to show strong persistence.

2. Liquidity: Liquidity conditions underwent major changes in Q3. Surplus conditions in October and early November were overwhelmed by the impact of the withdrawal of SBNs from November 9. Currency in circulation plunged by Rs 7.4 trillion up to December 2; consequently, net of replacements, deposits surged into the 3 banking system, leading to a massive increase in its excess reserves. “Liquidity management was bolstered by an increase in the limit on securities under the market stabilisation scheme (MSS) from Rs 0.2 trillion to Rs 6 trillion on November 29,” the RBI stated.

3. GVA outlook: The outlook for GVA growth for 2016-17 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.

4. 7th Pay Panel: In the services sector, the outlook is mixed with construction, trade, transport, hotels and communication impacted by temporary SBN effects, while public administration, defence and other services would continue to be buoyed by the 7th Central Pay Commission, one rank one pension (OROP).

5. Demonetisation: In India, while supply disruptions in the backwash of currency replacement may drag down growth this year, it is important to analyse more information and experience before judging their full effects and their persistence – short-term developments that influence the outlook disproportionately warrant caution with respect to setting the monetary policy stance.