RBI’s MPC unexpectedly left interest rates unchanged and shifted its monetary policy stance to `neutral,’ as it sought to assess the impact of demonetisation on inflation. The policy repo rate was left unchanged at 6.25%. “In this highly uncertain condition, the MPC exercised abundant prudence keeping the policy rate on hold… awaited a clearer and unbiased assessment of inflation,” RBI Governor told reporters after the policy decision. “It decided to shift the stance… to give us sufficient flexibility in either direction.” “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,” Patel said in the statement. He added that the decision is consistent with a neutral stance of monetary policy in consonance with the objective of achieving retail inflation at 5% by the 4th quarter of FY2017 and the medium-term target of 4% within a band of +/- 2%.
The MPC took the decision unanimously, and flagged significant upside risks to inflation – the hardening profile of international crude prices, volatility in the exchange rate due to global financial market developments, and the fuller effects of the house rent allowances under the 7th Central Pay Commission award that have not been factored in the baseline inflation path. The central bank expects inflation for the next fiscal year in a range of 4%-4.5% for the first half and 4.5%-5% in the second half. The RBI changed its economic growth (GVA) projection to 6.9% against its previous estimate of 7.1% GVA growth. It expects growth to pick up to 7.4% next year. Government security prices crashed after expectations of a rate cut had build following the government budget last week which seemed committed towards the path of consolidation. The benchmark G-sec fell to a 3-month low while the Rupee and the equity markets closed unchanged.