RBI retains repo rate, slashes GDP growth rate forecast for FY2017; withdraws incremental CRR

The Monetary Policy Committee (MPC) on Wednesday decided not to cut the repo rate (also referred to as policy rate) from 6.25 percent, contrary to the expectations of many analysts. The bigger damage, however, is in the economic growth rate forecast that has been revised downwards to 7.1 percent from 7.6 percent. On the positive side, the Reserve Bank of India (RBI) has withdrawn the incremental (100 percent) cash reserve ratio (CRR) on bank deposits.

Highlights of the MPC statement:

The outlook for gross value added (GVA) growth for 2016-17 has turned uncertain after the unexpected loss of momentum by 50 basis points in Q2 and the effects of the withdrawal of SBNs, which are still playing out.

Incorporating the expected loss of growth momentum in Q3 and waning effects in Q4 alongside the boost to consumption demand from a higher agricultural output and the implementation of the 7th CPC award, GVA growth for 2016-17 is revised down from 7.6 percent to 7.1 percent, with evenly balanced risks.

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 percent.

Incremental CRR withdrawn

"With the enhancement in the ceiling for the issue of securities under the Market Stabilisation Scheme (MSS) to Rs 6,000 billion, it has been decided to withdraw the incremental CRR effective the fortnight beginning December 10, 2016."

The 100 percent CRR was imposed on November 26 in view of the deposit surge witnessed by banks in the wake of demonetisation of high-value currencies by the Modi government on November 8, 2016.

Currencies returned to banks

The RBI said at the post-MPC meeting press conference that Rs 11.85 lakh crore have been returned to banks since demonetisation of Rs 500, Rs 1,000 notes announced by Prime Minister Narendra Modi on November 8, 2016.

"Almost Rs 11.85 lakh crore notes have been deposited so far," R. Gandhi, Deputy Governor,  RBI, said.  

Stock markets down

The BSE Sensex and NSE Nifty dropped after the decision to retain the repo rate and cut the GDP growth rate forecast for the financial year 2016-17. The 30-scrip Sensex fell 265 points to 26,221 after the announcement and extended losses to 276 points at around 2.57 pm. 

The BSE Bankex was down 1.01 percent while the Realty index dropped 0.95 percent.