Analysts say RBI hands tied given the flux in markets

Analysts today welcomed the status quoish policy stand of the Reserve Bank saying given the flux situations in the domestic and global markets, this was the most prudent stance it could adopt.
The Reserve Bank Governor-led Monetary Policy Committee unanimously voted to leave the policy rates of repo and reverse repo unchanged at 6.25 per and 5.75 per cent respectively.
"In a situation of flux - both locally as well globally, the prudent policy stance should be status quo. This is exactly what RBI did today in line with our view expressed earlier," India Ratings principal economist Sunil Kumar Sinha said in a note.

Global situation post-Brexit, Donald Trump becoming the president elect of the US, and referendum defeat of Renzi in Italy has created a substantial geopolitical uncertainty, he added.
It can be noted that as the Fed is expected to raise the policy rates at the next meeting, it has resulted in capital flight from emerging markets putting significant pressure on the rupee. Compounding the matter is the uptick in crude prices, which will have implications for inflation, he observed.
In a note, Japanese brokerage Nomura said the MPC decision to keep the repo rate unchanged has been a surprise as a vast majority of marketmen, including the brokerage itself, were expecting a 25 bps rate cut.

"Despite the surprise today, we believe the decision to stay put is a prudent one. We also expect demonetisation to hurt short-term activity, but we do not see any medium-term damage, as it will only result in wealth redistribution, and not much wealth destruction," it said.

Kuntal Sur of PwC India attributed the status quo policy stance to the global factors like stronger dollar, possibilities of a rate hike by the US Fed, hardening of oil prices which have negative implications on inflation.
On the withdrawal of the incremental 100 per cent CRR, he said it will lead to liquidity stabilisation, which "may force banks to pass on some rate cuts to consumers".

Naresh Takkar of Icra said, the unanimous vote to keep
the repo rate unchanged suggests that the focus has undoubtedly shifted back to inflation from growth concerns.
"Given that the impact of demonetisation is viewed as transitory but unclear at present, the door remains open for further rate cuts over the next few policies. At the same time, the RBI has withdrawn the additional CRR on banks from next fortnight, which will provide banks with the scope to still cut lending rates despite the pause on the repo rate," Takkar said.
Rudra Sensarma, professor of economics at IIM Kozhikode said the RBI move was a surprise, but also a positive signal as it is a "welcome sign of its independence and its commitment towards its inflation mandate".

Motilal Oswal of Motilal Oswal Financial Services attributed the status quo stance to Fed hangover. By not increasing the rate, the governor is looking more extrovert and is concerned about the international volatility, which is "a good tactical call as this will still leave a chance with him to see how the global economy reacts to Fed move and then take a call on domestic Interest rates.