TomorrowMakers ™

3 reasons why the RBI maintained status quo on repo rates

09 December 2016
Wondering why RBI didn’t change the repo rate? Here is everything you need to know.
 
 

Wondering why RBI didn’t change the repo rate? Here is everything you need to know.

In a surprising move, the Reserve Bank of India kept the repo rate unchanged at 6.25% during its fifth bi-monthly policy review. This decision has raised a lot of eyebrows because a rate cut of 25 basis points was largely expected.

Here’s why the RBI did not change the repo rates.

  1. Inflation

A potential rise in food inflation and a sharp increase in the prices of several items have been major factors.

The central bank states that prices of major food products such as wheat, sugar and gram have been steadily increasing. If the moderation in prices does not occur, food inflation pressures could possibly re-emerge.

Related: The 500-1000 rupee note demonetization decoded in India [Infographic]

  1. Market Volatility

The recent decision of OPEC to cut oil production has been a troubling piece of news for the Indian economy. A shortage of supply means that prices will shoot up. This will automatically increase the prices of petrol in the country. In addition, volatility in international markets and an imminent tightening of US Monetary Policy have contributed towards this decision.

  1. Wait and Watch approach

Due to the demonetization drive last month by the Prime Minister Narendra Modi, around 86 percent of the currency in circulation has been withdrawn. This has resulted in a massive liquidity crunch in the country, affecting everyone from farmers to large corporate companies. A rate cut would have provided the much required relief to investors, according to many in the industry.

In the short term, sectors like transportation, hotels and retail trade are facing the pinch of liquidity crunch. But the RBI feels that it is too early to take a decision as the impact of the big-note ban had not played out yet. Furthermore, growth would rebound strongly if the “impact is transient as widely expected,” according to a policy statement by the RBI. An increase in the circulation of new currency is expected as the bank has already issued Rs 4,00,000 crore worth of notes in lower denomination. It is confident that the usage of cashless payment systems would increase too.

The bottom line

The RBI has an unenviable job of balancing growth and inflation. This becomes all the more difficult when major events such as the demonetization drive completely change the equation. The RBI might have its reasons to maintain the status quo on repo rates but a 155 point drop in the Sensex clearly showed the market’s disappointment.

 
Market Quotes by TradingView

5 Major Economic Reforms

"5 Major Economic Reforms"

POLL

 

MOST VIEWED CONTENT

How does GST impact your wallet?

How does GST impact your wallet?

Deemed as the biggest tax reform, what does GST have in store for your finances?

Understanding your savings account

Understanding your savings account

You savings account is more than just a place to park your money. Here’s what you should know about it.

Decoding Inflation [infographic]

Decoding Inflation [infographic]

How exactly does it work and how does it affect you?

What you need to know about linking your Aadhaar and PAN card?

What you need to know about linking your Aadhaar and PAN card?

Haven’t linked your Aadhaar and PAN cards yet? Don’t know who it is meant for, or if it is necessary? Maybe this can help.

Financial tips for new fathers

Financial tips for new fathers

Your priorities shift from when you were a man to now when you become a dad. Here are the few things that prepare you for a perfect fatherhood.

Stop thinking you don’t have enough money and start investing

Stop thinking you don’t have enough money and start investing

You are young, you are free, there’s a party this Friday like every other Friday, and you have no worry. Well, maybe just one teeny-weeny bit of worry at the back of your mind: is it time to start investing?

7th Pay Commission: What you must know about it?

7th Pay Commission: What you must know about it?

The 7th Pay Commission is on the verge of being finalised. Here’s what you should know about it.

boy

We would love to hear from you!

Question, comment or concern? Our contact form is the best way to get in touch. We will respond to you within 5 working days.

NEWSLETTER