RBI trims GDP forecast, talks of note ban ‘risks’

Mumbai: The Reserve Bank of India (RBI) on Wednesday kept its lending rate unchanged despite calls for action, and lowered the country’s growth forecast by 0.5 percentage points after the Centre’s shock currency switch a month ago.  

The central bank kept the interest rate — at which banks borrow money — at 6.25 per cent, and reduced the gross domestic product (GDP) growth forecast from 7.6 per cent to 7.1 per cent for 2016-17.

It was the RBI’s first monetary policy committee (MPC) meeting after the government’s decision on November 8 to demonetise Rs 500 and Rs 1,000 banknotes that has led to a crippling cash crunch. The bank however held out hope of a future rate cut or an “accommodative stance.”

The RBI took these key decisions as it waits to see the repercussions of the demonitisation move and the impact of global uncertainties.

The apex bank noted that there were risks to growth from two channels: short-term disruptions in the near future to cash-intensive sectors like retail trade, tourism, restaurants and transportation and the unorganised sector; and the aggregate demand compression associated with adverse wealth effects.

The RBI said the demonetisation decision was taken “after detailed deliberations” to curb black money and stop counterfeiting and forging of currency notes that helped terrorists.  

But good news is that banks could in future reduce rates on home loans and bring down EMIs as they are flush with funds following the return of the impounded cash though the cash reserve ratio (CRR), the portion of deposits that banks have to keep with the RBI. People have so far deposited about Rs 12 lakh crores in the banned currency notes.

On the shortage of currency notes and the problems caused by the high denomination Rs 2,000 notes, the RBI said “this problem was on top of the mind”, and the presses were working to full capacity.

Announcing the fifth bi-monthly policy statement, RBI governor Urjit Patel who heads the MPC said it is “prudent to wait and watch” how factors like demonitisation and the downward inflexibility of inflation excluding food and fuel, besides global volatility would play out.

The RBI noted that on the inflation front, food prices other than those of vegetables were exhibiting firmness and a pick-up in momentum.

No rate cut means borrowings by banks from the RBI won’t be any easier. This may also impact spending by people. Intense cash shortage already threatens to slow India’s economy that grew by an annual 7.3 per cent between July and September, the fastest rate for a large economy in the world.

The move has left millions low on cash and hit India’s largely cash-based economy, prompting the Opposition to mount a relentless attack on the government.

On November 24, former Prime Minister Manmohan Singh tore into PM Narendra Modi’s decision to spike high-value currencies, and said India’s GDP growth will plunge by two percentage points because of the government’s move.

The government has maintained demonetisation is part of a crackdown on tax dodgers and counterfeiters. But with a small stock of smaller notes available and new bills of Rs 500 and Rs 2,000 in short supply, Indians are being forced to stand in queues outside banks and cash machines.