The RBI has maintained the repo rate unchanged at 6.25% at the monetary policy meeting today. The markets were expecting a rate cut of 25bps, and the status-quo stance of the RBI has induced short term volatility in the domestic stock markets.
A rate cut could have helped in boosting consumption which goes hand in hand with the growth oriented budget. However, this could have also further increased pressure on the inflation which is already being pushed up by the rising oil prices. With OPEC cutting production, we can expect oil prices firming up further to settle at around $60 a barrel this year which might increase the inflation further. Further the reduction in Consumer Price Index (CPI) post demonetization is expected to recede once adequate new currency is pumped into the economy.
The Fed has indicated it will hike rates thrice this year, which will further close the gap between US rates and the Emerging Markets. The RBI's status quo will help in maintaining foreign interest in the Indian economy, and it comes at a great time as the dollar is on a slide since the beginning of this year. A rate cut later in the coming months would have better and positive impact on the economy once the picture of remonetisation is clearer.