MUMBAI/KOLKATA: The Reserve Bank of India surprised investors by keeping interest rates unchanged amid widespread expectations they would be slashed to support growth. RBI also lowered its growth forecast for the year and said this was mostly on account of the second-quarter slump but acknowledged that demonetisation — which it staunchly defended — would temporarily disrupt economic activity.RBI Governor Urjit Patel ruled out any special dividend to the government equivalent to the black money extinguished by the note withdrawal, while seeking to assure the public that the banking system was doing its utmost to restore normalcy by increasing the supply of notes.The central bank also scrapped the ad hoc, incremental cash reserve requirement (CRR) it imposed on November 26, a relaxation that should translate into lower cost of funds and bring rates down indirectly. The central bank said the monetary policy was “consistent with an accommodative stance”.In the face of government signals favouring a rate cut, the six-member monetary policy committee’s vote was unanimous. The monetary policy’s focus was on inflation, Patel said, adding that the disruption caused by demonetisation would be significant but transitory.“The committee felt that it is now important to ensure that the targets of 5% for the fourth quarter of 2016-17 and also 4% plus or minus 2% for the medium term are achieved,” Patel said at the postpolicy press conference on Wednesday.“This assumes critical importance in view of the stickiness in inflation excluding food and fuel and the recent rising profile of international crude prices and the continuing firmness in the prices of some salient food items.”The repo rate, at which RBI lends to banks, was kept at 6.25% and the reverse repo rate, at which banks park their surplus deposits with RBI, at 5.75%. One basis point is 0.01 percentage point. The 100% incremental CRR, the proportion of deposits that banks keep with RBI without interest, will be withdrawn from December 10.The MPC said the economic effect of the demonetisation of Rs 500 and Rs 1,000 notes was “unclear” but that it will have a positive effect on inflationary pressure.Given uncertainties on multiple fronts, RBI’s decision got a thumbs-up from the government.“It is a bold and brilliant call by the Reserve Bank of India. Bold, because it is contrary to what people expected,” said Arvind Subramanian, chief economic advisor. “Two or three very important considerations that went into it — one is, both domestically and internationally, these are times of unusual volatility, and therefore, this was a time to ensure that there is some continuity and stability.”State Bank of India Chairman Arundhati Bhattacharya indicated surprise at the decision to hold rates given that the country’s biggest lender sees prices as less of a threat due to the effect of demonetisation. “Our internal assessment… suggests that there has been a significant demand destruction post demonetisation, and we believe that inflation could be meaningfully below the RBI 5% target as of March 2017,” she said in an analysis written for ET. “This may have clearly prompted the RBI to retain the word ‘accommodative’ in the policy.”The central bank cut the key rate by 25 basis points in its last policy in October. Counting this, RBI has cut rates by a cumulative 175 basis points since January 2015, Patel pointed out.Most of the questions for the central bank leadership at the press conference expectedly revolved around the move announced by Prime Minister Narendra Modi on November 8 that has led to cash rationing and long queues at banks and cash machines with supply unable to keep up with demand.Patel said the decision had not been “taken in haste” and the fruits of demonetisation would be visible in the medium-tolong term as RBI and banks work overtime to replenish currency chests and ease the pain of customers.Deputy Governor R Gandhi said the value of old notes that had been deposited or swapped thus far amounted to Rs 11.5 lakh crore. That’s estimated to be more than two-thirds of the currency that had ceased to be legal tender. Gandhi said the amount may go up by the December 30 deadline. The government and the central bank have regularly tweaked withdrawal limits and deadlines in response to the progress of demonetisation.The debt market reacted sharply to the policy with government bond yields, especially on short-term paper, shooting up. Yields on benchmark bonds spiked by as much as 21 basis points to 6.41%. Stocks fell, with the BSE Sensex ending 0.59% down at 26,236.87. The rupee ended 0.38% or 26 paise higher at 67.64 to the dollar.RBI lowered the economic growth forecast to 7.1% from 7.6% due to the secondquarter slowdown and the currency withdrawal, which is also seen reducing inflation by 10 to 15 basis points. Inflation was projected at 5% in the fourth quarter, lower than the October forecast. “With respect to demonetisation, the assessment that this will have only a transient impact on growth is welcome,” said ICICI Bank Chief Executive Chanda Kochhar.The central bank said the inconvenience caused by the currency exchange could ease in the days ahead as it ramps up production of new currency notes to meet demand.“The assessment that we have made is that available stock of notes and production plan based on that we are confident that we could meet the requirements of the public,” said deputy governor Gandhi.“We have given to the public 19 billion notes, which was equivalent to what was supplied in three full years.” Among the long-term benefits of demonetisation will be greater transparency and higher tax revenues.“We will have more transparency, public finances could improve and important collateral benefit is the thrust of digital banking is taking place,” said Patel. “Banks, RBI and the government are working closely on it and that benefit will work on many factors like accountability and transparency.”According to the inflation expectation survey of households, the proportion of respondents expecting general prices to rise by “more than current rate” in threemonth and one-year ahead declined sharply from the November round. Similar sentiments were observed across all product groups. Three-month and one-year ahead median inflation rates declined sharply by 130 basis points in this round compared to the September round.The next meeting of the monetary policy committee will be held on February 7 and 8, 2017, RBI said. The policy will be announced on February 8.