The Monetary Policy Committee of the Reserve Bank of India (RBI) on kept the short-term lending rate, called repo rate, unchanged at 6.25 per cent.

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.

After lacklustre trading through the day, the benchmark Sensex and Nifty50 tanked over half a per cent in knee-jerk reaction to the announcement.

“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,” RBI said.

All six members of the MPC voted in favour of the monetary policy decision. The minutes of the MPC’s meeting will be published by February 22, 2017

“The committee decided to change the stance from accommodative to neutral while keeping the policy rate on hold to assess how the transitory effects of demonetisation on inflation and the output gap play out,” the RBI statement said.

The committee believes that the environment for timely transmission of policy rates to banks lending rates will be considerably improved if (i) the banking sector’s non-performing assets (NPAs) are resolved more quickly and efficiently; (ii) recapitalisation of the banking sector is hastened; and, (iii) the formula for adjustments in the interest rates on small savings schemes to changes in yields on government securities of corresponding maturity is fully implemented, RBI said.

The central bank is aiming to target 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.

Demonetisation-induced ease in bank funding conditions has led to a sharp improvement in the transmission of past policy rate reductions into marginal cost-based lending rates (MCLRs).

A reduction in MCLR led to fall in lending rates for healthy borrowers, which should spur a pick-up in both consumption and investment demand.

The domestic macro-economic backdrop clearly called for continuous monetary easing, especially because the fiscal impulse to growth remained modestly negative.

The macro backdrop for the monetary policy review was conducive for continued monetary easing. Inflation remains low and contained at 3.4 per cent, which is below RBI’s target.

Retail inflation is likely to be well below RBI’s target of 5 per cent this financial year, as demonetisation would discourage any headwind on the price front, the Economic Survey for 2016-17 said.

Global environment too was stable. In its December policy review, one of the reasons cited by RBI to hold policy rate was Fed’s tightening stance and the associated strength seen in the US dollar. Since then, the USD has stabilised and, in fact, weakened to some extent.

Source: The Economic Times