RBI Policy: Key takeaways from MPC's rate decision

Moneycontrol BureauThe Reserve Bank of India (RBI) today declared its interest rate decision. Below are the key takeaways from the policy statement.1. The Reserve Bank of India kept the policy repo rate at 6.25 percent against many expectations of a 25 bps cut.2. It said that its monetary policy committee’s decision was consistent with a neutral stance of monetary policy3. GVA growth for 2016-17 seen at 6.9% with risks evenly balanced around it4. GVA growth for 2017-18 projected at 7.4% with risks evenly balanced5. RBI said the decline in headline CPI inflation in November and December was larger than expected but due almost exclusively to deflation in vegetables and pulses6. Prices of pulses likely to remain soft and vegetable prices may rebound as demonetisation effects wear off7. Headline CPI inflation in Q4 of 2016-17 likely to be below 5 percent, in first half of next financial year at 4.0-4.5% and 4.5-5.0% in the second half8. Three significant upside risks: international crude prices, volatility in exchange rate and fuller effects of HRA allowances under Pay Commission award9. Growth expected to recover sharply in 2017-18 on account of several factors10. Factors are demonetisation-hit discretionary consumer demand to come back starting in the closing months of current year;11. Economic activity in cash-intensive sectors such as retail, restaurants, unorganized sectors to be rapidly restored;12. Demonetisation-induced ease in bank funding has led to sharp improvement in transmission of past policy rate reduction; 13. Budget emphasis on stepping up capital expenditure and boosting rural economy, affordable housing should contribute to growth14. Uncertainty in the direction of US macroeconomic policies but said emerging market economies’ growth prospects were expected to improve moderately15. Transmission of lower rates contingent on: Reduction in bank NPL, recapitalization of banking sector and formula for adjustment of interest rates on savings schemes being more aligned to G-Sec rates.16. Weekly cash withdrawal limit to be Rs 50,000 from February 20 to March 13.
17. No limit on cash withdrawal post March 13.

18. Notes in circulation (including remonetisation) Rs 9.92 lakh crore.

19. Core inflation remains stubborn at 4.8 percent-4.9 percent (perhaps one of the reasons behind the ‘no change’ decision)

20. Resolution of stressed assets of banks key to rate transmission and re-starting of the capex cycle.

21. Government open to different modes of resolution including creation of a “Bad Bank”. Finding the ‘right buyer’ to take the assets at the ‘right price’ is important.

22. Endeavour to maintain real interest rates between 1.25 percent-1.5 percent.