RBI monetary policy as it happened: Disappointed by status quo, says SBI chief

Ahead of the Reserve Bank of India (RBI) bi-monthly monetary policy review, the Indian equities markets opened on flat note on Wednesday. Investors are cautious ahead of the key announcement, and expect the central bank to ease its key lending rates.

FP Staff December 07, 2016 15:16:44 IST
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RBI monetary policy as it happened: Disappointed by status quo, says SBI chief



Dec 07, 2016 - 16:15 (IST)

SBI chairman Arundhati Bhattacharya on RBI announcement

SBI chairman Arundhati Bhattacharya tells CNBC TV18 that she is disappointed by the status quo announcement, calling it a non-event. 

We expected at least a 25 basis point cut.

Urjit Patel might have kept three things in mind while taking the decision: the rising oil prices, stabilised commodity prices and the certain hike in US Federal Reserve rate.

There has been a demand disruption in the near past.  

The rate cut might have helped market sentiment. But we are relieved that additional CRR is now taken away. We believe that ample liquidity will drive rates down and there may be lowering of rates in future. 

Dec 07, 2016 - 15:53 (IST)

Chief Economic Advisor Arvind Subramanian

RBI took a bold and brilliant call. The move counters expectations and it is the right call in current circumstances. Interest rates across world except India has gone up considerably.

Dec 07, 2016 - 15:47 (IST)

Market impact

After the central bank kept the bank rates unchanged, the Sensex dropped 155.89 pts to end at 26,236.87, while Nifty fell 41.10 pts to 8,102.05.

Dec 07, 2016 - 15:43 (IST)

RBI cuts growth forecast to 7.1 per cent, sees short-term disruption

The Reserve Bank cut the economy's expansion forecast for current fiscal to 7.1 per cent, from 7.6 per cent earlier, saying that short-term disruption in economic activity and demand compression arising out of demonetisation have led to downside risks to growth.

The Indian economy expanded by 7.1 per cent and 7.3 per cent in the first and second quarter of the ongoing fiscal.

RBI said 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.

RBI today kept short term lending rate unchanged saying it is adopting a wait and watch policy to see the effect of withdrawal of 500 and 1000 rupee notes from circulation.

RBI said the second quarter GDP quarter was lower than projected because of deeper than expected slowdown in industrial activity. "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 said.


Dec 07, 2016 - 15:38 (IST)

RBI monetary policy

The headline inflation is projected at 5 per cent by the fourth quarter of 2016-17 with risks tilted to the upside but lower than in the October policy review.

The fuller effects of the house rent allowances under the Seventh Pay Commission award are yet to be assessed, pending implementation, and have not been reckoned in this baseline inflation path.

The withdrawal of old high value currency notes could transiently interrupt some part of industrial activity in November-December due to delays in payments of wages and purchases of inputs, although a fuller assessment is awaited.

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

The central bank also said that almost Rs 12 lakh crore out of total Rs 14.5 lakh crore in scrapped notes have already been deposited in banks. RBI has also withdrawn 100 per cent incremental Cash Reserve Ratio (CRR) from December 10, a move that would allow banks to retain the deposits coming to them as part of demonetisation.

All the six members of Monetary Policy Committee headed by the RBI Governor voted in favour of the today's decision. In the view of the Committee, this bi-monthly review is set against the backdrop of heightened uncertainty.

Globally, the imminent tightening of monetary policy in the US is triggering bouts of high volatility in financial markets, with the possibility of large spillovers that could have macroeconomic implications for emerging markets.

While supply disruptions in the backdrop of currency replacement may drag down growth this year in India, 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.

"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. 


Dec 07, 2016 - 15:33 (IST)

Demonetisation to impact activities in cash-intensive sectors 

Demonetisation could result in short-run disruptions in economic activity in cash-intensive sectors like retail trade, hotels, restaurants and transportation, and the unorganised sector.

The withdrawal of old Rs 500 and 1,000 notes "could result in a possible temporary reduction in inflation of the order of 10-15 basis points in Q3 (October-December period".

RBI, however, kept retail inflation target of 5 per cent for the fourth quarter of the fiscal and the medium-term target of 4 per cent within a band of +/- 2 per cent while supporting growth.

Monetary Policy Committee felt that the assessment is clouded by the still unfolding effects of the withdrawal of specified bank notes (SBNs).

"The outlook for GVA (gross value added) 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 SBNs (Rs 500/1,000 notes) which are still playing out," the policy document said.

Downside risks in the near term could travel through two major channels. One is short-run disruptions in economic activity in cash-intensive sectors such as retail trade, hotels and restaurants and transportation, and in the unorganised sector.

The second channel is aggregate demand compression associated with adverse wealth effects.

The impact of the first channel should, however, ebb with the progressive increase in the circulation of new currency notes and greater usage of non-cash based payment instruments in the economy while the impact of the second channel is likely to be limited.


Dec 07, 2016 - 15:22 (IST)

RBI and government singing the same tune

One must note that the RBI governor Urjit Patel was broadly singing the same tune as the government on the demonetisation issue.

The governor played down the impact of the demonetisation process on the economy beyond the short term, contradicting what the many private economists have warned.

Patel also made it a point to state that there is no ‘trust deficit’ in the public post the demonetisation and even said most people are lauding the government move since it will help curb black money, terror funding and fake currency in the system.

The governor also spoke about the benefit of moving to a cashless economy, something the government has been highlighting all along.

The big take away is that Patel hasn’t given any room for demonetisation critics to speculate that RBI and government are not on the same page on the demonetisation issue.

Dec 07, 2016 - 15:21 (IST)

Following are the highlights of RBI's fifth bi-monthly monetary policy statement, 2016-17:

Repo rate unchanged at 6.25 percent, Reverse Repo at 5.75 percent 

Cash reserve ratio or CRR unchanged at 4 percent

Cuts growth forecast to 7.1 percent, from 7.6 percent for this fiscal

Inflation target remains 5 percent for March 2017, upside risk

Demonetisation to lower prices of perishables, could reduce inflation by 10-15 basis points by December

All MPC members voted in favour of status quo in policy

Demonetisation to result in short-run disruptions in cash-intensive sectors

Crude price volatility, surge in financial market turbulence could put March end inflation target at risk

Foreign exchange reserve rose to all-time high of USD 364 billion on 2 December. 

RBI injected Rs 1.1 lakh crore liquidity through OMO purchases this fiscal

Next monetary policy on 8 February.


Dec 07, 2016 - 15:17 (IST)

Recaliberation of Rs 500 and 1,000 notes

Urjit Patel says recaliberation of Rs 500 and 100 notes has been fastened in last two weeks. Deputy Governor R Gandhi added that no decision has been taken on re-introducing Rs 1,000 notes. 

Dec 07, 2016 - 15:12 (IST)

Markets unfazed by policy outcome

Markets were not too worried about the RBI policy outcome. After the RBI's monetary policy announcement of maintaining status quo in repo rate, the S&P BSE Sensex fell 228 points or 0.86 percent to 26164.82 from Tuesday's close of 26392.76. However, it recovered some losses and currently trades at 26248.82, down 143.94 points or 0.55 percent. Rate sensitive stocks like SBI went down by 1.27 percent, ICICI Bank went down by 1.23 percent, HDFC Bank went down by 0.98 percent. 

Mumbai: An intense cash shortage in India could force the central bank to cut interest rates to a six-year low on Wednesday as Prime Minister Narendra Modi's currency gamble threatens to hit nearly every aspect of the economy, from consumers to supply chains.

A majority of the nearly 60 analysts polled by Reuters predict the Reserve Bank of India (RBI) will cut the repo rate by 25 basis points (bps) to 6.00 percent, the lowest since November 2010, while six predicted a deeper 50 bps cut.

Pressure on the RBI and Governor Urjit Patel to act has grown since Modi stunned the country on Nov. 8 with a drastic plan to abolish 500 and 1,000 rupee notes ($7.35-14.70), removing 86 percent of the currency in circulation in a bid to crack down on India's "shadow economy."

Data so far shows the measure has hit the cash-reliant economy more than expected: auto sales plunged and services sector activity dived into contraction last month for the first time in 1-1/2 years.

The prospect that India's robust growth will be derailed could offset any worries about a volatile global environment, which saw the rupee INR=D2 sink to a record low last month as part of a sell-off in emerging market assets.

RBI monetary policy as it happened Disappointed by status quo says SBI chief

Representational image. Reuters

According to Moneycontrol, "the RBI, guided by the newly-formed six-member monetary policy committee (MPC), is widely expected to cut its key lending rate — the repo rate — by 25 basis points to 6 percent. The MPC’s decision will be likely influenced by two factors: (a) the fall in consumer and investment spending because of the currency drain out, and (b) the outlook on inflation and the rupee’s value. In recent history, rarely has a single policy decision in the financial world had such an immediate impact as India’s move to retire old Rs 500 and Rs 1,000 currency notes."

Analysts say the RBI has room to act given consumer inflation eased in October to 4.20 percent, the slowest pace in 14 months and below the RBI's target of 5 percent for March 2017.

"We expect the RBI monetary policy committee (MPC) to cut rates by 25 basis points," said Radhika Rao, an economist with DBS Bank, in a note.

"While lingering external uncertainties raise the odds of a no-move, the RBI MPC is likely to take a growth supportive stance to offset downside risks to growth from the demonetisation effort."

A rate cut is not without risks. It would mark a second consecutive 25 bps easing by the six-member MPC, and some foreign investors warn it could raise concerns about whether the central bank is losing its focus on inflation.

A cut would also come at a time when emerging markets are under pressure after the election of Donald Trump as U.S. president last month sparked a surge of capital flows back into the United States, a trend that could accelerate as the Federal Reserve gears up to raise interest rates next week.

In India, foreign investors sold a net $4.7 billion in debt and equities in November even, though the country is seen as in better shape than other emerging markets.

But a rate cut would signal the RBI's priority is in supporting the economy, which grew an annual 7.3 percent between July and September, the fastest rate for a large economy in the world but still below the levels needed to sustain full employment.

Investors will also want more details from Patel about how the RBI is managing the process of demonetisation after coming under criticism from market participants for frequently announcing adjustments to its policies.

Most analysts say the RBI will likely partly roll back a directive for banks to place their entire deposits under the central bank's cash reserve ratio in a bid to absorb the extra liquidity generated by the government's banknotes move.

The need to keep it in place has eased after the government announced last week it would raise the issuance of special bonds to soak up the liquidity.

Ahead of the Reserve Bank of India (RBI) bi-monthly monetary policy review, the Indian equities markets opened on flat note. Investors are cautious ahead of the key announcement, and expect the central bank to ease its key lending rates.

The key Indian indices traded marginally in green during the early morning trade session, as healthy buying was witnessed in oil and gas, automobile and metal stocks. The wider 51-scrip Nifty of the National Stock Exchange (NSE) inched up by 17.35 points or 0.21 per cent to 8,160.50 points.

The barometer 30-scrip sensitive index (Sensex) of the BSE, which opened at 26,456.21 points, traded at 26,445.67 points (at 9.25 a.m.) -- up 52.91 points or 0.20 per cent from the previous close at 26,392.76 points. The Sensex has touched a high of 26,469.93 points and a low of 26,418.05 points during the intra-day trade so far.

The BSE market breadth was tilted in favour of the bulls -- with 931 advances and 326 declines. On Tuesday, the equity markets closed on a flat note as profit booking and caution ahead of key global events capped gains.

The barometer index was up 43.66 points or 0.17 per cent, while the NSE Nifty rose by 14.40 points or 0.18 per cent.

With inputs from IANS and Reuters


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