India Holds Interest Rates Unexpectedly After Demonetization
December 07 2016 - 2:28AM
RTTF2
India's central bank unexpectedly kept its key interest rate
unchanged on Wednesday as policymakers decided to wait to judge the
impact of the drastic demonetization measure on the economy and any
policy tightening by the U.S. Federal Reserve next week.
The Monetary Policy Committee of the Reserve Bank of India,
headed by Urjit Patel, unanimously decided to hold the key repo
rate at 6.25 percent and reverse repo rate at 5.75 percent.
The repo rate was last reduced by a quarter-point in October at
the first meeting chaired by Governor Patel. Economists had widely
expected a 25-basis point reduction in key rates in his second
meeting, as the banks were flooded with funds after demonetization,
while lack of funds among consumers dent demand.
This was the first meeting after India withdrew the legal tender
status for highly transacted currency notes of INR 500 and INR
1,000 in a surprise move on November 8, citing their rampant use in
illegal activities and a high incidence of fake bills.
"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," the bank said in a statement.
Policymakers also decided that it was "appropriate to look
through the transitory but unclear effects" of the currency
withdrawal while setting the monetary policy stance.
Further, the RBI observed that the imminent tightening of
monetary policy in the U.S. is triggering bouts of high volatility
in financial markets, with the possibility of large spillovers that
could have macroeconomic implications for emerging market
economies.
If demonetization turns out not to be as damaging as the
anecdotal reports suggest, a rate cut today could have been
reversed in early 2017, economists at Capital Economics said.
However, if economic activity has been damaged as much as many
fear, the RBI's wait-and-see approach will come to be seen as
complacent, they added.
The central bank lowered its growth outlook for fiscal 2016-17
to 7.1 percent from 7.6 percent. According to the RBI, the outlook
for growth has turned uncertain after the unexpected loss of
momentum by 50 basis points in the second quarter. Also, the
effects of the high value currency ban are still playing out, the
bank noted.
Inflation is expected to slow by 10-15 basis points in the
December quarter due to the currency ban. Headline inflation is
projected at 5 percent in the March quarter of 2016-17 with risks
tilted to the upside.
The downward inflexibility in inflation excluding food and fuel
was "disconcerting, which could set a resistance level for future
downward movements in the headline figure, the bank pointed
out.
The RBI also withdrew the incremental cash reserve ratio of 100
percent on deposits September 16 and November 11 on Wednesday,
which it had announced on November 26 to absorb excess liquidity in
the system following the demonetization.
The liquidity released due to the discontinuation of the
incremental CRR would be absorbed by a mix of market stabilization
scheme and liquidity adjustment facility operations, the bank
said.
US Dollar vs TRY (FX:USDTRY)
Forex Chart
From Apr 2024 to May 2024
US Dollar vs TRY (FX:USDTRY)
Forex Chart
From May 2023 to May 2024