RBI raises cash withdrawal limit to ₹50,000; status quo on rates

Contrary to market expectations, the Reserve Bank of India (RBI) on Wednesday decided to maintain status quo in its key rates, while projecting an even lower GDP growth rate for the economy at 6.9% for 2016-17 than the 7.1% it had projected in December 2016.

The RBI also announced that the cash withdrawal limit from savings bank accounts would be relaxed to ₹50,000 from February 20 to March 13, after which the restrictions on withdrawals are expected to be lifted.

The repo rate at which it lends to the system remains at 6.25%—a six-year low—and the reverse repo rate at which it absorbs excess liquidity also stays at 5.75%.

“This is on expected lines for the simple reason that it’s not clear whether the banks, which are sitting on cheap deposits post-demonetisation, have passed on the earlier rate cut to its customers,” says economist NR Bhanumurthy from the National Institute of Public Finance and Policy (NIPFP). In its last policy review also, in December 2016, the RBI had kept the policy rate unchanged.

“Even when the RBI had reduced lending rates by as much as 175 basis points, the commercial banks only slashed their lending rates by only 80-90 basis points,” adds Bhanumurthy. One basis point equals to 1/100th of one percent.

The six-member Monetary Policy Committee (MPC) also decided to change the stance from “accommodative” to “neutral” to assess how the transitory effects of demonetisation on inflation and the output-gap play out, the RBI resolution said.

In layman’s language, the RBI says it would focus on keeping inflation rate low—and not go into rate cuts aimed at boosting the growth rate.

The RBI Industrial Outlook Survey also states that financing conditions have worsened in Q3 of 2016-17 and are expected to remain tight in Q4.

INDUSTRY DISAPPOINTED

It’s no secret that industry had been gunning for lower interest rates and apparently had been putting pressure on the government as well.

“A cut in the repo rate would have boded well for the economy. Giving a push to demand which has taken a hit in the demonetisation process is critical as also the need to incentivise domestic private investment in the country which remains lackadaisical,” said FICCI President Pankaj Patel.

The previous RBI Governor Raghuram Rajan stayed impervious to government pressure on reducing interest rates for a long time. Consequently, one of the top priorities of the Narendra Modi government was to remove the veto power of the RBI Governor on monetary policy and replace it with a 7-member MPC—that would consist of four representatives from the Finance Ministry and the rest from RBI—to decide on interest rate.

This was seen as the government diluting the autonomy of the apex bank. Finally, the government agreed to a 6-member MPC with equal representation from the government and the RBI.

The RBI expects consumers, “held back by demonetisation” to start spending. It expects economic activity to be rapidly restored in cash-intensive sectors such as retail trade, hotels and restaurants; transportation; and the unorganised sector.

But, with the unorganised sector supposedly ravaged by demonetisation, the rosy picture it expects in the near future looks far-fetched.

With PTI inputs.