Pa­tel Keeps Rates Un­changed, Prefers to Drive in Neu­tral Mode

Room to cut rates shrinks as stance shifted from ac­com­moda­tive to neu­tral

The Economic Times - - Front Page - Our Bureau

Mon­e­tary Pol­icy Re­view The six-mem­ber Mon­e­tary Pol­icy Com­mit­tee sees in­fla­tion pol­icy can move ei­ther di­rec­tion, room for rate cut has now shrunk Mum­bai: The Re­serve Bank of In­dia sur­prised in­vestors for the third time in a row by keep­ing in­ter­est rates un­changed and shifted its pol­icy stance to neu­tral af­ter one-and-a-half years of ac­com­moda­tive stance, sig­nalling a pos­si­ble end to the down­ward in­ter­est rate cy­cle.

The de­ci­sion dashed hopes of a rate cut to help the econ­omy re­cover from the mas­sive shock of de- above the tar­geted 4% mon­eti­sa­tion and trig­gered a bond mar­ket rally that pushed yields to three-month high. The ru­pee ended 0.32% stronger against the dol­lar and stocks ended lower.

The shift to a neu­tral stance sig­nals the end of the down­ward in­ter­est rate cy­cle though gov­er­nor Ur­jit Pa­tel said it gives the mon­e­tary pol­icy com­mit­tee the flex­i­bil­ity to ‘move in ei­ther di­rec­tion’. For­mer gov­er­nor Raghu­ram Ra­jan sparked this cy­cle early in Jan­uary 2015 when he started cut­ting rates in re­sponse to col­laps­ing global com­mod­ity prices and the re­sul­tant crash in do­mes­tic pro­ducer prices. RBI has cut rates by 175 ba­sis points since then but banks have not passed on the en­tire ben­e­fit to con­sumers, Pa­tel noted.

“Given the gen­eral en­vi­ron­ment of un­cer­tainty both do­mes­ti­cally and abroad, the RBI de­ci­sion to main­tain sta­tus quo was on ex­pected lines,” State Bank of In­dia chair­man Arund­hati Bhat­tacharya said.

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