SURPRISE SURPRISE! NO RATE CUT FROM RBI

The Reserve Bank of India kept unanimously decided to keep the  key policy rates unchanged , a move that has surprised many market experts and investors , amid widespread speculation that rates will be reduced to spur growth and consumption. The central bank has also scrapped the incremental CRR imposed on banks , a movement that should soothe banks and led to liquidity flush. However,  Governor Urjt Patel has sequenced any possibility of a special dividend to the Government equivalent to the amount of black money extinguished from the market and said that liability of the central bank does not get reduced by pulling notes out of circulation. 

Now most of the market experts who predicted a rate cut , some of them even went to the extent of 50 basis point , were caught in the wrong foot. Now there are several factors that may be key to the unchanged policy rates. First , the general uncertainty due to FED rate hike and and OPEC decision to cut supply. A weaker rupee and a stronger dollar may not be the ideal combination in periods of global uncertainty, as it will make dollar even costlier. These may lead to a spur in inflation and this has generated a resistance to further down move of interest rates as it is utmost important to ensure that 5% inflation target in Q4 and 4%(+-2) for medium is achievable. Second, RBI is very much aware of the immigrant tightening of USA that may lead to spill over effect on emerging markets as well as India. Lastly, most market experts expected a rate cut primarily as a response to the demonetization , but RBI decided to view this as a "transient shock " that is bound to ease in shorter time and it does not wrrent a formal policy response.

Thus ,yesterday's hawkish policy response from RBI underscores the fact that Gov. Urjit Patel and 6 member MPC will represent a continuity , rather than a break , of the policies and approach of their predecessor.