Decoded: Why RBI unexpectedly kept rates unchanged amid cash crunch

1481110979-7124

RBI left its key policy rate unchanged at 6.25 per cent. The decision was largely unexpected by markets but not by BNP Paribas. We were in a small minority expecting unchanged policy rates. Three factors appear to have been key to the unchanged verdict. First, RBI is clearly cognisant of increased global uncertainty. “Imminent tightening” by the US Fed, the risk of “large spill-overs” to emerging markets and “firmer oil prices” were all cited as reasons for policy caution. Second, the stickiness of inflation, particularly “core” inflation, was noted as “disconcerting” and potentially generating a resistance level for future downward movements in inflation. RBI acknowledged inflation risks are skewed to the upside even before the full impact of the 7th Pay Commission on housing costs, let alone the likely inflationary impact of GST, have been factored in. Third, RBI sensibly decided to view demonetisation and the ensuing disruption to the economy as a largely “transient” shock that, in the base case, does not warrant a formal policy response.

Read more….

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s