RBI Says Note Withdrawal Will Interrupt Industrial Activity In Q3

MUMBAI (Commoditiescontrol) – The Monetary Policy Committee of the RBI decided to keep the policy repo rate under the liquidity adjustment facility unchanged at 6.25 per cent. Consequently, the reverse repo rate under the LAF remains unchanged at 5.75 per cent, and the marginal standing facility rate and the Bank Rate at 6.75 per cent.

The decision not to change rates is consistent with an accommodative stance of monetary policy in consonance with the objective of achieving consumer price index inflation at 5 per cent by Q4 of 2016-17 and the medium-term target of 4 per cent within a band of +/- 2 per cent, while supporting growth.

The RBI decision also assumes importance for Q3, as it feels that the assessment is clouded by the still unfolding effects of the withdrawal of specified bank notes (SBNs). The withdrawal, RBI acknowledges, could briefly 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. Industrial activity had remained weak in Q2. Among the core industries in the IIP, the output of coal contracted in October due to subdued demand, while the production of crude oil and natural gas shrank under the binding constraint of structural impediments. The production of cement, fertilisers and electricity continued to decelerate, reflecting the sluggishness in underlying economic activity.

However, the positive factor the RBI sees is the steady expansion in acreage under rabi sowing across major crops compared to a year ago over and above the robust performance of agriculture in Q2.

In the services sector, the outlook is mixed with construction, trade, transport, hotels and communication impacted by temporary SBN 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).

Gross value addition by financial services is expected to receive a short-term boost from the large inflow of low-cost deposits.

(By Commoditiescontrol Bureau; +91-22-40015522)