Taking markets by surprise, the Reserve Bank of India (RBI) governor Urjit Patel, on December 7, 2016, kept short-term lending rates unchanged, even as the central bank lowered GDP growth rate to 7.1% and forecast short-term disruption in economic activities due to demonetisation.
The Patel-led six-member Monetary Policy Committee, which had in its first policy review cut interest rate by 0.25% in October, belied expectations, to keep benchmark repo rates unchanged at 6.25%, unanimously.
See also: Home loans to get cheaper, as banks promise to pass on RBI rate cut
In view of the disruption in economic activities due to demonetisation, the RBI lowered growth forecast from 7.6% to 7.1%, for the current fiscal.
“A rate cut could have been encouraging at this moment. However, it is disappointing that the RBI decided against it. We were expecting a 25 bps cut, which could have given an impetus to the beleaguered real estate sector,” said Shishir Baijal, chairman and managing director, Knight Frank India.
Echoing this sentiment, Rohit Gera, managing director of Gera Developments and VP, CREDAI – Pune Metro, said: “The recent demonetisation move by the government, had led to substantial liquidity in the banking system. Further, this move has led to the need for a stimulus to the economy. The stimulus could have come, by way of a rate cut by the RBI. A drop in interest rates is essential, to aid the growth of the economy at large and also to stabilise and boost the real estate sector, where many developers are struggling with slow sales, high inventory and high debt. A rate cut would also have given interim relief to home buyers in the affordable segment, thereby, enabling government’s ‘Housing for All’ vision.”
The headline inflation is projected at 5% by the fourth quarter of 2016-17, with risks tilted to the upside but lower than in the October policy review. The fuller effects of the house rent allowances under the Seventh Pay Commission award are yet to be assessed, pending implementation and have not been reckoned in this baseline inflation path, the fifth bi-monthly monthly monetary policy said.
On demonetisation, it said, the withdrawal of old high value currency notes could transiently interrupt some part of industrial activity in November-December due to delays in payments of wages and purchases of inputs, although a fuller assessment is awaited.
“In the services sector, the outlook is mixed with construction, trade, transport, hotels and communication impacted by temporary old currency notes effects, while public administration, defence and other services would continue to be buoyed by the 7th Central Pay Commission (CPC) award and one rank one pension (OROP),” it added.
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