India Monetary Policy December 2016


India: Central Bank refrains from cutting interest rates in surprise move

December 7, 2016

The Reserve Bank of India (RBI) decided to keep monetary policy unchanged at a scheduled meeting on 7 December, surprising market analysts who had expected a cut. The RBI held the repurchase rate at 6.25%—an over five-year low. All six members of the monetary policy committee voted to keep the rate unchanged. Accordingly, the Bank also decided to keep the marginal standing facility rate (Bank Rate) at 6.75% and the reverse repurchase rate at 5.75%.

The Bank’s decision to maintain its policy stance was driven by increased global uncertainty. The Bank pointed out that financial markets have been volatile in the wake of the U.S. presidential election and expected tightening of U.S. interest rates could have large spillover effects for emerging markets. Moreover, base effects for consumer prices are expected to turn unfavorable and the recent OPEC agreement to reduce output could cause oil prices to firm. The Bank outlined that its decision to hold rates is consistent with its accommodative stance and designed to achieve the inflation target of 5.0% by Q4 FY 2016.

Regarding growth, the Bank’s move comes despite a cloudier outlook for growth in India’s economy as the government’s decision to cancel two high denomination currency notes in November disrupts cash availability. Commenting on this, the Bank highlighted that it is too early to judge the full effects of the demonetization and that if the impact is temporary, growth could rebound strongly. However, in the near term, disruptions in cash-dependent sectors are likely to hurt activity and this, combined with lower than expected growth in Q2 FY 2016, prompted the Bank to lower its forecast for growth from 7.6% to 7.1% in FY 2016.

Looking forward, the RBI will likely react to incoming data, therefore it took a wait-and-see stance in its accompanying statement. Economists at Scotiabank, share their outlook for next year, explaining:

“We assess that the RBI’s monetary easing phase is approaching its end; we expect the RBI to cut interest rates one more time in the first quarter of 2017 in order to support economic activity. […] India’s inflation environment remains favourable for the time being, allowing for further cautious monetary stimulus in early 2017. […] In the medium term, price pressures will likely gradually strengthen in line with global energy prices, yet we expect inflation to remain within the RBI 4% ±2% y/y target through 2018.”

Our panelists are still taking the latest developments into account and project that the repurchase rate will average 6.27% at the end of FY 2016. For FY 2017, panelists also see the repurchase rate ending the year at 6.27%.

Author: Angela Bouzanis, Senior Economist

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India Monetary Policy Chart

India Monetary Policy December 2016

Note: Marginal Standing Facility (MSF) Rate, Repo Rate and Reverse Repo Rate in %.
Source: Reserve Bank of India (RBI).

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