RBI keeps status quo on key lending rate

CASH WITHDRAWALS: Limit to go up to Rs 50,000 per week from Feb 20, and to go altogether from March 13 –

MUMBAI: India’s central bank on Wednesday kept key lending rates unchanged, saying it awaits more data on inflation trends and on the impact of demonetisation on economic growth, even as it shifted its monetary policy stance from accommodative to neutral citing inflationary fears and global uncertainties. The industry expressed disappointment at the decision.
Soon after the policy review, the RBI also announced that the limits on savings bank cash withdrawals post-demonetisation are to be withdrawn in two stages, with the limit slated to go up to Rs 50,000 per week from February 20, and to go altogether from March 13.
The RBI’s Monetary Policy Committee (MPC) at its sixth and final policy review for the fiscal 2016-17, kept the repurchase rate, or the short-term lending rate it charges on borrowings by commercial banks, unchanged at 6.25 per cent.
The reverse repurchase rate automatically remained unchanged at 5.75 per cent.
“On the basis of an assessment of the current and evolving macroeconomic situation at its meeting today, the MPC decided to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.25 per cent,” RBI said in its monetary policy statement.
“Consequently, the reverse repo rate under the LAF remains unchanged at 5.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 6.75 per cent.”
“The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving 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.”
Noting that excluding food and fuel, inflation has been unyielding at 4.9 per cent since September, RBI said: “The Committee is of the view that the persistence of inflation excluding food and fuel could set a floor on further downward movements in headline inflation and trigger second-order effects.” “It is important to note three significant upside risks that impart some uncertainty to the baseline inflation path — the hardening profile of international crude prices; volatility in the exchange rate on account of global financial market developments, which could impart upside pressures to domestic inflation; and the fuller effects of the house rent allowances under the 7th Central Pay Commission.”
The average level of retail inflation in 2015-16 was at 4.9 per cent.
The RBI noted that global trade remains subdued due to an increasing tendency towards protectionist policies and heightened political tensions.
More importantly, citing the surge in bank deposits post-demonetisation as a factor in holding its rates, the RBI said the transmission of policy rates by banks would depend on how soon three problems — of banks’ non-performing assets (NPAs), recapitalisation of the lenders and re-calibration of the small saving interest rates — are resolved.
More importantly, the apex bank said it was changing its policy stance from “accommodative” to “neutral”.
Addressing reporters here following the policy review, RBI Governor Urjit Patel said the decision to hold rates was taken in context of the “highly uncertain conditions” created by the impact of demonetisation.
“There is a shift in the stance of monetary policy from accommodative to neutral that would allow room to manoeuvre in either direction,” Patel said.
“I think this (change of stance) is mainly driven by a concern about global inflation which is picking up on fuel and metal side. This could also be a risk coupled with the strengthening of dollar and it could feed into significant inflation for our economy,” RBI Deputy Governor Viral Acharya said. — IANS