Patel Keeps Rates Unchanged, Prefers to Drive in Neutral Mode
Room to cut rates shrinks as stance shifted from accommodative to neutral
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.