Sensex, Nifty under pressure after RBI surprises repo rates unchanged

The Reserve Bank of India (RBI) on Wednesday left the policy rate unchanged at 6.25 percent in its fifth bimonthly policy review.

The market immediately reacted to the policy move in the most negative manner with the Sensex trading down 201.29 points at 26191.47 and the Nifty down 62.70 points at 8080.45 on the BSE.

The decision comes after the recent rise in crude oil prices with an upside risk of five percent inflation target for March 2017.

In light of this, the six-member monetary policy committee concurred that it was prudent to hold rates currently, given that a rate cut had been effected as recently as October.

Not surprisingly, the Reserve Bank of India conference sooner turned out to be largely about demonetisation.

Addressing the reporters on the wake of demonetisation, Urjit Patel said, "Along with the government, we did foresee the challenges due to secretive nature of the exercise."

It further stated that in total of Rs. 11 lakh crore of old notes (Rs. 500 and Rs. 1,000) have come back into the system so far after the decision of the government to no longer hold them as legal tender.

On November 26, 2016 the Reserve Bank had announced an incremental cash reserve ratio (CRR) of 100 percent of the increase in net demand and time liabilities (NDTL) of scheduled banks between September 16, 2016 and November 11, 2016 effective the fortnight beginning November 26, 2016.

It was intended to absorb a part of the large increase in liquidity in the system following the withdrawal of the legal tender status of Rs. 500 and Rs. 1,000 denomination bank notes.

It was also indicated that the incremental CRR was purely a temporary measure and that it would be reviewed on December 9, 2016 or even earlier.

Talking of the 7th Pay Commission disbursements, which may affect inflation in next financial year, the Governor said that the incremental CRR was purely a temporary measure.

"Inflation outcome in Sep, Oct vindicates current stance 7th Pay Commission salaries have not been disruptive to inflation outcome Core inflation assumes critical importance in policy MPC felt further reduction in policy rate not warranted Government has pro-actively responded with increasing mss limit to Rs. six lakh crore banks will not have to keep additional CRR from Dec 10, 2016.