“RBI’s Monetary Policy Committee has kept rates unchanged against market expectations of a cut.
This policy meeting was against a fluid and uncertain local and global situation. There are several moving parts currently viz. impact of the de-monetization move, slowdown in the local economy, moderate inflation but with stickiness at current levels, impact of the US Presidential Election and the strength of the US Dollar, potential tightening by the US Fed in December, portfolio outflows from India and emerging markets, political uncertainty in the euro zone and rising global commodity prices with the recent OPEC deal. The de-monetization move has created unexpected liquidity conditions which will get reversed in due course. The RBI has thus treated the current excess liquidity conditions as transient.
Given these uncertainties, the RBI considered it prudent to wait and watch rather than cut rates to project a stimulative bias. Economic growth forecast for India for FY17 has been revised from 7.6% to 7.1% to take into account the slowdown created by the de-monetization move. We believe that the next two quarters could continue to see slow growth, beyond which the economy could see return of growth.
The Monetary Policy Committee has demonstrated prudence – this will go a long way in establishing the objectivity, independence and inflation-targeting by the MPC under the current framework”.