Published On : Wed, Dec 7th, 2016

Stock markets fall sharply after RBI keeps repo rate unchanged

New Delhi:
The Reserve Bank of India (RBI) has kept its repo rate unchanged at 6.25 per cent in its first monetary policy review after the notes ban, surprising many. Economists polled by a leading electronic media had expected a 0.25 per cent rate cut to support the economy, after the government’s notes ban has threatened to hit nearly every aspect of it from consumers to supply chains. (Repo rate is the rate at which the central bank of a country -Reserve Bank of India in case of India- lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation.)

Acknowledging the threat to economic growth from notes ban, the RBI has cut its GDP forecast, slashing gross value added growth outlook to 7.1 per cent for FY 17 from 7.6 per cent earlier. This acknowledgement has vindicated the forecast made by former P.M. Singh, though he had surmised a decrease of 2% in GDP.

Many brokerages have already downgraded their GDP growth outlook for the year. Prime Minister Narendra Modi stunned the country with a ban last month on 500 and 1000 rupee notes, removing 86 per cent of the currency in circulation, in a bid to crack down on black or untaxed money.

Data so far shows the measure has hit the cash-reliant economy more than expected: auto sales plunged and services sector activity heavily nose dived last month for the first time in over two years. Analysts have also downgraded their outlook for Indian stock markets because the currency ban is seen knocking economic growth in the next few quarters.

“We are certainly disappointed with the lack of clarity from the policy commentary on the impacts of demonetization,” said Tirthankar Patnaik, India Strategist at Mizuho Bank. However, the RBI decision to keep rates unchanged “opens up room for a rate cut in February”, he said.

All six monetary policy committee members, led by RBI chief Urjit Patel, voted for no change in rates. Stock markets have fallen sharply after RBI kept its rates unchanged. The Sensex ended 156 points lower at 26,236.87 and the Nifty50 index closed 0.5 per cent lower at 8,102.

However, in a positive move for the banking sector, the RBI has withdrawn incremental cash reserve ratio (CRR) of 100 per cent on deposits. In a temporary measure, the RBI had last month raised the cash reserve ratio for banks to 100 per cent of their deposits to absorb the liquidity being created from people depositing their old notes. CRR or cash reserve ratio is the minimum percentage of a bank’s deposits that has to be held in the form of cash. Banks don’t earn any interest on deposits kept aside for cash reserve ratio requirements.