The Reserve Bank of India (RBI) has kept its repo rate unchanged at 6.25 per cent in its first monetary policy review after the notes ban, surprising the street. Economists had expected a 0.25 per cent rate cut to support the economy, after the government’s notes ban has threatened to hit nearly every aspect of it from consumers to supply chains.
Acknowledging the threat to economic growth from notes ban, the RBI has cut its GDP forecast, slashing gross value added growth outlook to 7.1 per cent for FY17 from 7.6 per cent earlier.
Many brokerages have already downgraded their GDP growth outlook for the year. Prime Minister Narendra Modi stunned the country with a ban last month on 500 and 1000 rupee notes, removing 86 per cent of the currency in circulation, in a bid to crack down on black or untaxed money.
Data so far shows the measure has hit the cash-reliant economy more than expected: auto sales plunged and services sector activity dived into contraction last month for the first time in over two years.
Analysts have also downgraded their outlook for Indian stock markets because the currency ban is seen knocking economic growth in the next few quarters.
All six monetary policy committee members, led by RBI chief Urjit Patel, voted for no change in rates. Stock markets have fallen sharply after RBI kept its rates unchanged. The Sensex was down over 150 points while Nifty was below 8,100.
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