Reserve Bank of India keeps rates on hold. Here’s why | business-news | Hindustan Times
Today in New Delhi, India
Jul 25, 2017-Tuesday
-°C
New Delhi
  • Humidity
    -
  • Wind
    -

Reserve Bank of India keeps rates on hold. Here’s why

The Reserve Bank of India (RBI) kept its repo rate on hold at 6.25% for a second straight policy meeting, opting to wait for more clarity on inflation trends and on how demonetisation is impacting economic growth. While expectation is running high of a 25 basis point rate cut on Wednesday, here are the factors that could hold RBI governor Urijit Patel back from announcing a cut:

business Updated: Feb 08, 2017 16:29 IST
Suchetana Ray
People walk past the Reserve Bank of India (RBI) head office in Mumbai.
People walk past the Reserve Bank of India (RBI) head office in Mumbai.(Reuters)

The Reserve Bank of India (RBI) kept its repo rate on hold at 6.25% for a second straight policy meeting, opting to wait for more clarity on inflation trends and on how demonetisation is impacting economic growth.

The RBI’s monetary policy committee on Wednesday voted 6-0, its third unanimous decision in a row since being established in September.

While expectation is running high of a 25 basis point rate cut on Wednesday, here are the factors that could hold RBI governor Urijit Patel back from announcing a cut:

Impact of demonetisation:

The consumer price index ( CPI) or retail inflation fell from 2.59% in November to 2.23% in December. It could cool further. But these falling numbers should be seen from the perspective of the squeeze in demand following demonetisation.

Global cues:

Oil prices have been on the rise ever since the petroleum exporting countries decided to freeze production. Upward-bound oil prices will push inflationary trends up. Along with oil, there are also expectations that global commodity prices will also see a spike in 2017.

Rising oil prices present a challenge to India’s growth, said the Economic Survey presented in Parliament earlier this week. “Price of crude oil (Indian basket) has increased from $39.9 in April 2016 to $52.7 in December 2016. For the next financial year, the recent uptick in global commodity prices, in particular crude oil prices, pose an upside risk,” it said.

US monetary policy:

The current interest rate effected by the US Federal Reserve at 0.75% shows signs of inching up. And there are expectations of a few hikes in 2017. This does not bode well for India, as a US rate hike will see dollar funds flee emerging markets. A revival of the US economy will strengthen the dollar putting pressure not only on the Indian rupee but also on the Indian exports.

Read more: RBI raises savings account withdrawal limit to Rs 50,000 from Feb 20, no limit from March 13