RBI keeps rates steady despite cash crunch

NEW DELHI: India’s central bank on Wednesday kept interest rates unchanged, despite a cash crunch prompted by a recent government move to withdraw high-value bank notes.

The Reserve Bank of India kept the key repo rate, the rate at which the central bank lends to commercial banks, steady at 6.25 per cent, contrary to expectations of a cut to boost liquidity and push consumption. RBI governor Urjit Patel cited risks inflation from rising global crude prices. He said a further cut was to oil not warranted, given that the bank had reduced the rate in its last review in October.

Bank notes of 500 and 1,000 rupees ceased to be legal tender from midnight on November 8, shortly after Premier Narendra Modi announced the move to fight corruption and tax evasion.

The move led to a liquidity crunch and widespread chaos as people queued up at banks to exchange old notes.

The RBI also lowered its forecast for gross value-added growth, from 7.6 per cent to 7.1 per cent, for the financial year. The GVA is different from gross domestic product, but is a measure to gauge economic activity in the country and thus reflects the GDP number.

Local media, citing economists, said the RBI forecast was an acknowledgment of the threat to economic growth by the currency move.

Economic think tanks say the move will disrupt economic activity and have revised down their growth outlook for India. RBI officials said they were still analysing data on the impact of the policy change.