RBI keeps key rates intact

Tribune News Service

New Delhi, December 7

Contrary to expectations, the Reserve Bank of India (RBI) today did not cut the benchmark interest rates but as demonetisation dominated the fifth monetary policy review of 2016-17, the central bank cut the growth estimate of the economy to 7.1 per cent from 7.6 per cent. The growth estimate has been lowered following short-term disruption in economic activity especially in cash intensive sectors and demand compression due to demonetisation.

Edit: Keep guessing

With questions being raised about the autonomy of the RBI following the demonetisation move, some analysts have said the pause mode on interest rates by RBI Governor Urjit Patel in today’s policy exercise reaffirms RBI’s independence from the government.

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The RBI Governor said the demonetisation decision was taken after detailed deliberations and not in haste. “The consequences that have emanated from that were taken on board. That is why the planning, the process and implementation was what it was, keeping in mind high secrecy had to be maintained. The central bank and the government were conscious of certain immediate difficulties for the public at large and all efforts were made to mitigate them,” he added.

Commenting on the RBI move, SBI chairman Arundhati Bhattacharya said: “The decision of keeping the repo rate unchanged was a little surprising given that there has been sizeable demand destruction. Probably this may have happened due to considerations of possibilities of rise in energy prices as well as with an eye on Fed rate hike.”

On cutting the growth estimate, the RBI said the outlook for Gross Value Added (GVA) growth for 2016-17 had 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.

RBI Deputy Governor R Gandhi said almost Rs 11.85 lakh crore in the scrapped Rs 500 and Rs 1,000 notes had come back to the banking system.

With such a huge chunk of scrapped notes coming back, the government will now have to identify the black money holders and initiate action as weeding out black money was among the top aims of the demonetisation exercise.