Market reacts negatively to RBI's decision to keep repo rates intact

On Wednesday, RBI's Monetary Policy Committee (MPC) issued the fifth Bi-monthly Monetary Policy Statement, 2016-17 Resolution.

The BSE Sensex fell 228 points intraday but the fall was later restricted by the RBI's decision to withdraw incremental CRR from December 10 and positive global cues, media reported.

On Wednesday, BSE Sensex closed down 155.89 points at 26236.87 and NSE Nifty closed down 41.10 points at 8102.

Repo rate is the rate at which the Reserve Bank of India lends money to commercial banks. Reverse Repo rate is the short term borrowing rate at which RBI borrows money from banks.

The RBI kept the repo rate under the liquidity adjustment facility (LAF) unchanged at 6.25 per cent.

Consequently, the reverse repo rate under the LAF remained unchanged at 5.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 6.75 per cent.

According to experts, a lowering of the repo rate would have lowered the borrowing costs of banks and the likely lowering of bank lending rates, which would have boosted private investments.

In its statement, the RBi said, "The decision of the MPC is consistent with an accommodative stance of monetary policy in consonance with the objective of achieving consumer price index (CPI) inflation at 5 per cent by Q4 of 2016-17 and the medium-term target of 4 per cent within a band of +/- 2 per cent, while supporting growth."

According to the RBI, "On the domestic front, the growth of real gross value added (GVA) in Q2 of 2016-17 turned out to be lower than projected on account of a deeper than expected slowdown in industrial activity. Manufacturing slowed down both sequentially and on an annual basis, with weak demand conditions and the firming up of input costs dragging down the profitability of corporations."

Turning to Q3, the Committee felt that the assessment is clouded by the still unfolding effects of the withdrawal of specified bank notes (SBNs).

The Committee said that the outlook for GVA growth for 2016-17 has turned uncertain after the unexpected loss of momentum by 50 basis points in Q2 and the effects of the withdrawal of SBNs which are still playing out.

The central bank said that steady expansion in acreage under rabi sowing across major crops compared to a year ago should build on the robust performance of agriculture in Q2. By contrast, industrial activity remains weak.

The RBI also lowered GDP projection to 7.1 per cent for this fiscal from an earlier estimate of 7.6 per cent, media reported.

The next meeting of the MPC is scheduled on February 7 and 8, 2017.

The RBI, on Wednesday, said it is withdrawing the 100 per cent incremental cash reserve ratio (CRR) requirement imposed on Nov 26, which was welcomed by banks, media reported.

CRR is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank.

On Nov 26, 2016 the RBI had announced an incremental cash reserve ratio of 100 per cent 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.

The RBI said tt was intended to absorb a part of the large increase in liquidity in the system following the withdrawal of the legal tender status of rupees 500 and rupees 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, said the RBI.

The RB also said that with the enhancement in the ceiling for issue of securities under the Market Stabilisation Scheme (MSS) to Rs 6,000 billion, it has been decided to withdraw the incremental CRR effective the fortnight beginning December 10, 2016. The liquidity released by the discontinuation of the incremental CRR would be absorbed by a mix of MSS issuances and LAF operations.

Some of the key stocks that gained on Wednesday were Adani Ports, Hero MotoCorp, Tata Motors and M&M while Sun Pharma, TCS, Tata Steel, Lupin, ITC Ltd and Wipro declined.

In a separate development, The Economist correspondent Stanley Pignal was not invited to the post-MPC Press Meet conducted by the RBI on Wednesday and was not allowed to attend the same.

In a series of tweets Pignal said, "Amazing stuff: @theeconomist us no longer invited to RBI policy meeting press conferences. Won't let me in. Sad day for transparency."

"RBI spokeswoman says decision to exclude me has nothing to do with @TheEconomist (critical) coverage of demonetisation."

"I've been critical of new governor not speaking to press, did not expect RBI to freeze us out of press conference. It's their call obviously."

The reason for the exclusion is not clear, according to media reports.