RBI cuts growth estimate

Even before the demonetisation effect plays out fully, the Reserve Bank of India has cut growth estimates for the economy to 7.1% from 7.6% earlier. Citing a slowdown in the second quarter (July-September), it said it had also factored in demonetisation, but the impact on GDP growth would be only about 15 basis points.Surprisingly , the RBI's monetary policy panel, which decides interest rates, shunned a growth booster by holding rates, pointing to steady food prices and the risk of rising oil prices.
Disappointed at the central bank's decision to hold its key policy rates, stock and bond prices fell on Wednesday . The BSE Sensex fell 156 points, reversing a two-day trend and yield on the benchmark 10-year bond shot up by 20 basis points to 6.40%. However, banks remain confident that loans will get cheaper after the RBI decided to release funds locked by way of an incremental cash reserve ratio (CRR). Before the policy, most bankers and economists were almost unanimous in their view that RBI would cut rates in its bi-monthly policy review.
RBI governor Urjit Patel strongly defended demonetisation. “The motivation for the decision was to deal with the problem of high-quality counterfeit notes and unearth black money that may be held in cash. The decision was not taken in haste but after detailed deliberations,“ he said.
Highlighting the benefits of the move that continues to affect people across the country , Patel said the security of new notes had been enhanced. “We will have more transparency . In term of fiscal and tax compliance, we will be at a better place and public finances could improve. A very important collateral benefit is the thrust on digitisation taking place,“ he added.
On inflation, Patel said that prices were sticky . “CPI inflation, excluding food and fuel, has been resistant to downward impulses and could set a floor to headline inflation. With the OPEC's agreement to cut production, crude prices may firm up in the coming months. Global developments, especially as financial markets factor in the future stance of US monetary and fiscal policy , could impart volatility to the exchange rate, thereby feeding into inflation,“ said the RBI governor.