Not only inflation and growth, now demonetisation may top RBI's monetary policy agenda

India Ratings, in a note said that the impact of demonetisation, which has led to a surge in the bank deposits, will be one of the factor kept in mind while deciding the rate cut.

We expect the Reserve Bank of India (RBI) to maintain status quo in its upcoming monetary policy review in December 2016, said In-Ra. Photo: Reuters

Till now, Reserve Bank of India's (RBI) monetary policy was mainly governed by inflation and growth figures. However, Prime Minister Narendra Modi as thrown another variable in the mix -- demonetisation.

India Ratings, in a note said that the impact of demonetisation, which has led to a surge in the bank deposits, will be one of the factor kept in mind while deciding the rate cut.

Banks have already collected nearly Rs 3 lakh crore and the Government told Supreme Court that it expects a total deposit of Rs 11 lakh crore.

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The demonetised Rs 500 and Rs 1000 crore notes represented 86% of the total currency in circulation in India, or Rs 14 lakh crore.

Anuradha Basumatari, Associate Director at India Ratings said, “We expect the Reserve Bank of India (RBI) to maintain status quo in its upcoming monetary policy review in December 2016, despite the downward trend in retail inflation witnessed over the past four consecutive months.”

Suresh Sadagopan of Ladder7 Financial Advisories had somewhat similar opinion. He said, “Potentially there can be room for rates cuts as the liquidity in the system is higher now. But a lot depends on how much money will eventually stay in the banking system.”

Banks have already hinted that the excess deposits may mean softer lending rates. Axis Bank has already slashed its MCLR on select offerings by 0.15%.

An average floating home loan now costs 9.15% interest per year, down from 9.30% per year a few months ago.

Overall, India Ratings feels, the government’s measures is likely to be dis-inflationary as economic activity witnesses a downward bias. This may open up room for further monetary accommodation later, once the full impact of demonetisation of currency manifests.

But for now Ind-Ra feels RBI should maintain a status-quo. Moreover, the reason for an RBI-pushed rate cut may already happen with surging deposits that are improving banks' CASA ratios (current account to savings account).

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India Ratings Reserve Bank of India (RBI)Economy Consumer Price Index (CPI) Inflation Wholesale Price Index (WPI)Demonetisation bank notes Narendra Modi Monetary Policy rate cuts