Contrary to expectations, the Reserve Bank of India (RBI) has kept the repo rate – the rate at which the banks borrow from the central bank – unchanged at 6.25% while reviewing the Monetary Policy on Wednesday, the first policy since the government’s demonetisation drive in November. 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%.
“Despite the surprise today, we believe the RBI’s decision to stand pat is a prudent one. We also expect demonetisation to hurt short-term activity, but we do not see any medium-term damage as it will only result in wealth redistribution, and not much wealth destruction. Moreover, while headline inflation is low, underlying inflation has stabilised around 5%,” said Sonal Varma, Nomura’s Chief India Economist.