Monetary policy panel to 'wait and watch' impact of demonetisation

The RBI's December decision to hold its key interest rate at 6.25 per cent was based on the unanimous view of the Monetary Policy Committee to take a prudent "wait and watch" approach pending more information on the full effects of demonetisation and against the backdrop of volatility in financial markets provoked by the then imminent tightening of monetary policy in the US.

The minutes of their meeting of December 6-7, released on Wednesday, suggest the members also felt the volatility in global crude oil prices and the surge in financial market turbulence could put the inflation target for the fourth quarter of 2016-17 at some risk, given the indicators of underlying inflation.

"Food prices other than vegetables are exhibiting sustained firmness and a pick-up in momentum. Given these indicators of underlying inflation, it is appropriate to look through the transitory but unclear effects of the withdrawal of SBNs (specified bank notes) while setting the monetary policy stance," the minutes said.

"On balance, therefore, it is prudent to wait and watch how these factors play out and impinge upon the outlook.

"While supply disruptions in India in the backwash of currency replacement may drag down growth this year, it is important to analyse more information and experience before judging their full effects and their persistence," it added.

"Globally, the imminent tightening of monetary policy in the US is triggering bouts of high volatility in financial markets, with the possibility of large spillovers that could have macroeconomic implications for EMEs (emerging market economies)."

The US Federal Reserve last Wednesday increased its key interest rate by 25 basis points in the first rate hike in 2016 and just the second in a decade. It raised rates by 0.25 percentage points to a range of 0.50 per cent and 0.75 per cent.

The six-member committee has Reserve Bank of India Governor Urjit Patel as chairman and the central bank's Deputy Governor R. Gandhi and Executive Director Michael Patra, as the institution's representatives.

The three outside experts are: Chetan Ghate, Professor at Indian Statistical Institute; Pami Dua, Director at the Delhi School of Economics; and Ravindra Dholakia, Professor at the Indian Institute of Management, Ahmedabad.

The committee, during its first meeting, cut a key lending rate by 25 basis points, bringing much relief to commercial banks and India Inc.

With that decision, the repurchase rate, or the short-term lending rate charged by the central bank on borrowings by commercial banks, was lowered to 6.25 per cent, while the reverse repurchase rate automatically stood adjusted to 5.75 per cent.

--IANS

bc/vd