Demonetisation impact to be transitory: RBI Governor Urjit Patel on rate hold

Mumbai: RBI Governor Urjit Patel voted for status quo on the key interest rate arguing that the central bank needs to remain focused on inflation target as the impact of demonetisation on economy is uncertain, though transitory.

Releasing today the Minutes of the Monetary Policy Committee Meeting (MPC) held on December 6-7, Reserve Bank of India said all the six members of the panel were in favour of retaining the repo rate at 6.25 percent.

In his submission before MPC, Patel said: "The impact of the withdrawal of SBNs (Specified Bank Notes of Rs 500 and Rs 1000) on growth and inflation, while uncertain, is transitory."

Against this backdrop, he said it is important for monetary policy to "stay focused" on the medium-term and strive to achieve, on a durable basis, the middle of the notified inflation target range of 4 percent.

More recently, the steady easing of food inflation has brought about a decline in overall inflation expectations in the latest round of the survey, he said.

Patel added: "Inflation in advanced economies is turning up incipiently and is expected to rise significantly in 2017 from 2016 levels. Achieving the inflation target of 5 percent for Q4 of 2016-17 and securing 4 percent - the central point of the notified target range - remains the primary objective."

Deputy Governor R Gandhi too opined that there was uncertainty about the short-term impact of the decision to withdraw the legal tender status of Rs 500 and Rs 1000 denomination on the macroeconomy, although the impact is likely to be transitory.

"I, however, don't see any significant downside risks to the medium-term growth prospects of the economy. However, there are other uncertainties as well, especially the oil price situation and geo-political situation," he said.

Another member Ravindra H Dholakia said while the recent developments on SBNs can be considered as an "exogenous shock" to the economy that results in downward revision of the GDP growth forecast, it is widely perceived to be a transitory or temporary phenomenon.

"If it is so, it is not advisable to respond with a policy intervention that involves longer distributive lags, because otherwise it can destabilise the system or create avoidable uncertainty in policy stance and action in future," he said.