BUSINESS

Reserve Bank Keeps Interest Rates Unchanged At 6.25%

The RBI's monetary policy committee voted 6-0 to leave the repo rate unchanged, after cutting it by 25 basis points (bps) at its last review in October, also unanimously.

07/12/2016 3:36 PM IST | Updated 07/12/2016 3:47 PM IST
Danish Siddiqui / Reuters
The Reserve Bank of India (RBI) Governor Urjit Patel speaks during a news conference after the bimonthly monetary policy review in Mumbai, India December 7, 2016. REUTERS/Danish Siddiqui

The Reserve Bank of India (RBI) unexpectedly kept its policy repo rate unchanged at 6.25 percent on Wednesday, despite calls for action as an intense cash shortage threatens to slam the brakes on the world's fastest growing large economy.

The RBI's monetary policy committee voted 6-0 to leave the repo rate unchanged, after cutting it by 25 basis points (bps) at its last review in October, also unanimously.

A majority of the 56 analysts polled by Reuters had expected a rate cut of at least 25 bps, though 18 had forecast policy would remain unchanged.

Pressure on the RBI and Governor Urjit Patel to act has grown since Modi stunned the country on Nov. 8 with a drastic plan to abolish 500 and 1,000 rupee notes ($7.35-14.70), removing 86 percent of the currency in circulation in a bid to crack down on India's "shadow economy."

While shortages of new bank notes are still being reported and some companies' cash-reliant supply chains have been left in tatters, some analysts had warned a rate cut on Wednesday could be premature given lingering concerns about inflationary pressures.

Although consumer inflation eased in October to 4.20 percent, the slowest pace in 14 months, prices in India have traditionally been dependant on volatile food and fuel prices. Global crude oil prices have spiked in the last week.

The RBI's more cautious approach also comes amidst a volatile global environment, which saw the rupee sink to a record low last month as part of a sell-off in emerging market assets.

"The decision of the MPC is consistent with an accommodative stance of monetary policy in consonance with the objective of achieving consumer price index inflation at 5 per cent by Q4 of 2016-17 and the medium-term target of 4 percent within a band of +/- 2 per cent, while supporting growth," the RBI said in a statement.

The benchmark 10-year bond yield rose sharply, and was up 13 bps from levels before the decision. The NSE stock index was down 0.4 percent.

Calls for the RBI to cut rates at its next monetary policy will now likely grow.

India's economy grew by an annual 7.3 percent between July and September, the fastest rate for a large economy in the world but still below the levels needed to sustain full employment.

That expansion is now threatened after data so far shows Modi's action has hit the cash-dependent economy more than expected: auto sales plunged and services sector activity dived into contraction last month for the first time in 1-1/2 years.

(Reporting by Suvashree Dey Choudhury and Rafael Nam; Editing by Kim

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