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RBI Keeps Interest Rates Unchanged, Lowers Growth Forecast in First Monetary Policy Review After Demonetisation

File photo of Reserve Bank of India  (Photo: Reuters)

File photo of Reserve Bank of India (Photo: Reuters)

The Reserve Bank of India has kept its benchmark interest rate unchanged, going against the expectations of a rate cut to boost the economy.

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Tushar Dhara

New Delhi: The Reserve Bank of India has kept its benchmark interest rate unchanged, going against the expectations of a rate cut to boost the economy. It also cut its growth forecast for fiscal year 2016-17 from 7.6 per cent to 7.1 per cent.

The Reserve Bank of India left its benchmark repurchase rate unchanged at 6.25%. The RBI said that the decision was made on the basis of “an assessment of the current and evolving macroeconomic situation” at its meeting on Wednesday.

The central bank also lowered its growth forecast for the current financial year 2016-17 to 7.1% from 7.6%.

"Incorporating the expected loss of growth momentum in Q3 and Q4 alongside the boost to consumption from higher agricultural output and the implementation of the 7th pay commission award, GVA growth for 2016-17 is revised down from 7.6 per cent to 7.1 per cent."

The repurchase rate is the interest rate at which the RBI lends money to commercial banks, which in turn lend to individuals and companies for things like home loans, car loans and education loans. A cut in the interest rate makes loans cheaper and boosts lending, which increases economic transactions.

The central bank said that the downside risks in the near term could come through short-run disruptions in economic activity in cash-intensive sectors and aggregate demand compression associated with adverse wealth effects.

"The impact of the first channel should, however, ebb with the progressive increase in the circulation of new currency notes and greater usage of non-cash based payment instruments in the economy," the statement said.

"While the impact of the second channel is likely to be limited. In October 2016, GVA growth in H2 was projected at 7.7 per cent and for the full year at 7.6 per cent."

Addressing the media post the decision, RBI deputy governor RS Gandhi defended the demonetisation and said that the decision was not taken in haste.

"The decision was taken with due deliberations. Four lakh crore higher denomination notes have been supplied so far. The RBI has printed more currency notes post demonetisation than in the last 3 years," Gandhi said.

The Central Bank also said that some 19 billion notes have been given to public and the withdrawal limit will be revised if a need arises.

"Public need not worry about availability and should freely use the currency," RBI governor Urijit Patel said post the announcement


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