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Reserve Bank of India keeps rates unchanged

The Reserve Bank of India (RBI) left key rates unchanged on Wednesday, with the repo rate constant at 6.25% in the first monetary policy outing since the government’s demonetization move going against the tide of market expectations. The BSE Sensex crashed 183 points immediately after the announcement.

“On the basis of an assessment of the current and evolving macroeconomic situation at its meeting today, the Monetary Policy Committee (MPC) decided to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.25%. Consequently, the reverse repo rate under the LAF remains unchanged at 5.75%, and the marginal standing facility (MSF) rate and the Bank Rate at 6.75%,” the RBI said in a statement.

This was the second monetary policy decision taken by the six-member Monetary Policy and also the second one for Urjit Patel as the apex bank’s chair.

The market was expecting a 25 bps rate cut as the economy grapples with a cash crunch in the aftermath of demonetization which has sucked out 86% currency in value terms and has been now converted (nearly the entire amount) into bank deposits. Some were even expecting a larger 50 bps cut in the repo rate to boost growth which is likely to take a hit as consumption and demand have thinned as liquidity ran dry.

In October, both the retail and wholesale inflation eased on lower food prices, which increased the likelihood of a rate cut, according to brokerages.

In the month, WPI inflation dipped to 3.39% while CPI inflation cooled to 4.20%.

After the announcement, the 30-share BSE Sensex tanked 183.77 points to 26,208.99, down 0.70%. The markets had factored in a 25 bps rate cut.

The central bank governor and deputy governers will interact with the media from 1445 hours to 1505 hours, during which they are likely to break their silence on demonetization.

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