The Reserve Bank of India (RBI) surprised markets and bankers Wednesday by keeping its policy rate — the repo rate — unchanged saying uncertain global and local factors, including the squeeze on cash and the after-effects of demonetisation of high value notes, had prompted it to adopt a wait-and-watch approach.
The six-member Monetary Policy Committee (MPC), which voted unanimously in favour of keeping the policy repo rate unchanged at 6.25 per cent, felt that “the assessment is clouded by the still unfolding effects of the withdrawal of specified bank notes (SBNs)” of Rs 500 and Rs 1,000 denominations
The RBI, however, withdrew the 100 per cent Cash Reserve Ratio (CRR) — the ratio of deposits to be kept with the central bank — on deposits raised between September 16 and November 11, releasing more liquidity into the system.
Unveiling the fifth bi-monthly Monetary Policy Statement for 2016-17, the RBI sharply lowered its FY17 growth projection from 7.6 per cent to 7.1 per cent, taking into account the negative impact of demonetisation. It said demonetisation is expected to hurt growth and inflation only for a transitory period. With core inflation sticky, global crude oil prices high and signs of an increase in certain food prices (wheat, gram and sugar), the RBI believes it is prudent to “wait-and-watch” for now.
Responding to a query on whether restrictions on withdrawal of money would be reviewed, RBI Deputy Governor R Gandhi said, “Yes, it’s a continuous review. The programme as of now is up to December 30.” He said it was difficult at this point to specify the exact date for lifting curbs on the daily and weekly limits on withdrawal of cash from ATMs and bank branches.
With three weeks left for the December 30 deadline to return the scrapped currency notes, as much as 81 per cent, or Rs 11.55 lakh crore — out of a value of Rs 14.17 lakh crore notes in circulation at the end of March 2016 — has already come back into the banking system, the RBI said.
According to RBI Governor Urjit Patel, the central bank and government-run note presses are working to full capacity and all efforts are being made to reach notes to every part of the country. In fact, during this period (from November 10 December 5), the Reserve Bank has supplied notes of various denominations worth Rs 3.81 lakh crore. On shortage of currency notes, he said, “In the coming days, as supplies reach the banks, some of these concerns will be alleviated.”
On lower denomination notes of Rs 100, Rs 50, Rs 20 and Rs 10, the Reserve Bank, over its counters and through bank branches all over the country, has supplied 19.1 billion pieces of denominations in this period — Rs 100 — 8.5 billion; Rs 50 — 1.8 billion; Rs 20 — 3.1 billion; and, Rs 10 — 5.7 billion notes. “This is more than what the Reserve Bank had supplied to the public in the whole of last three years,” Gandhi said.
Asked about reasons for the demonetisation, Patel said the motivation for the decision was to deal with the problem of high quality counterfeit notes in these denominations and unearth black money held in cash. The decision, he said, had not been taken in haste but after detailed deliberations.
“There had to be a high level of secrecy surrounding this decision and the fact is that such a large country was indeed taken by surprise when the decision was announced,” he said.
On problems being faced by the people due to cash shortage, Patel said, “The Reserve Bank and the central government were conscious of certain immediate difficulties that the public at large could face and all efforts were made to minimise them and mitigate them.”
Problems of the common people, he said, were at the top of the policy maker’s radar and all dispensations were calibrated to address them without jeopardising the achievement of the larger policy objectives.
Gandhi said demonetisation was announced after a detailed assessment. He also asked people to switch over to the digital mode to tide over the cash crunch.
“We reiterate that there is adequate supply of notes and hoarding of notes helps nobody’s cause. We also strongly advocate the public to switch to digital payment modes given that there are several options, there are adequate safeguards and there is an increasing acceptability of this mode of payment by a large number of recipients,” he said.
Going by the Governor’s statement, the government is unlikely to make any windfall — in the form of a special dividend — from demonetisation of notes.
Patel said demonetisation would not have any automatic impact on the RBI’s balance sheet. “Actually, the withdrawal of legal tender characteristics status does not extinguish any of RBI’s balance sheet. Therefore, there is no implication on the balance sheet as of now. The question of a special dividend automatically does not arise as of now. Not just by the withdrawal of legal tender character. No,” he said.