Belying the expectations of a rate cut, the monetary policy committee (MPC) has not only decided to keep the rates unchanged in its meeting today but more importantly, has shifted its stance from “accommodative” to “neutral’. This is “to assess the transitory effects of demonetization on inflation and the output gap”. The shift marks a significant reversal of policy as it had maintained “accommodative’ stance all through the year. A look at the reason for the same..
WPI based for the month of April was released last week with inflation showing an increase for the first time after 17 months. The reversal may cause anxiety if this turns out to be the beginning of another upward movement in the inflation cycle.