RBI keeps repo rate unchanged at 6%; raises inflation forecast
The Reserve Bank of India on Wednesday retained the repo rate at 6 basis points in its fourth bi-monthly monetary policy review of 2017-18. The central bank also kept the reverse repo rate at 5.75 per cent. The cash reserve ratio (CRR) too has been left unchanged at 4%. The primary reason behind no change in policy rates reflects the Reserve Bank of India's focus on inflation control. The uptick in the GDP (Gross Domestic Product) numbers for the September quarter - after seeing continuous decline for five quarters - eased pressure on the RBI to lower the monetary policy rates. The banking sector stocks entered a negative territory ahead of the RBI's monetary policy decision as the stock market opened on Wednesday. BSE banks constituting 10 key banking stocks traded at 114 points or 0.40 per cent lower at 28,345 level.
Here's more from the press briefing after the Monetary Policyt Committee meeting:
3:12 PM: MPC took note of pressures from food and fuel prices; said committed to keeping headline inflation at 4 percent, says RBI governor. Farm loan waiver, partial roll back of duty on fuel, cut in GST rates on several items may result in fiscal slippage, RBI Governor Urjit Patel warned.
3:11 PM: At the Monetary Policy Committee meeting, Chetan Ghate, Pami Dua, Michael Debabrata Patra, Viral V Acharya and Urjit R Patel were in favour of keeping the repo rate unchanged while Ravindra H Dholakia voted for a policy rate reduction of 25 basis points.
3:10 PM: Use of point of sale terminals has increased, as per RBI
3:07 PM: We believe that it possible to link all bank accounts with Aadhaar by the end of December, says RBI Deputy Governor Viral Acharya
3:05 PM: Both BSE and NSE slipped during the day.
3:04 PM: Given present condition of currency circulation,, we will achieve neutrality by first half of current fiscal year, says RBI Deputy Governor Viral Acharya
3:02 PM: Will consider open market operations to manage liquidity conditions, said RBI Deputy Governor Viral Acharya
3:00 PM: Liquidity conditions continue to normalise after demonetosation, said RBI Deputy Governor Viral Acharya
2:59 PM: 5 out of 6 MPC members favoured no change in rates
2:57 PM: RBI says Gross Value Added powered by a sharp acceleration in industry activity, in Q2
2:56 PM: Urjit Patel said, "rise in food, fuel prices may further harden expectations".
2:53 PM: MPC expressed concern possible fiscal slippage, said RBI Governor Urjit Patel
2:50 PM: On PSB's being reapitalised, recap bonds will be frontloaded for banks which have maintained their better balance sheets, said RBI Governor Urjit Patel
2:47 PM: The improvement in the ease of doing business should give boost the economy, says RBI governor Urjit Patel.
Consequently, the reverse repo rate under the LAF remains at 5.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 6.25 per cent. The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth. The main considerations underlying the decision are set out in the statement below.
The industry had earlier expressed that the RBI should cut the interest rate to further build on positive sentiment generated by the rebound and upgrade of the country's sovereign rating by Moody's that said the structural reforms, including the GST, DBT and recapitalisation of the public sector banks, will enhance India's high growth potential and will contribute to a decline in the government debt.
Let's understand what is repo rate and reverse repo rate.
When we need money, we take loans from banks. And banks charge certain interest rate on these loans. This is called as cost of credit (the rate at which we borrow the money). Similarly, when banks need money they approach the RBI. The rate at which banks borrow money from the RBI by selling their surplus government securities to the central bank is known as "Repo Rate." Repo rate is short form of Repurchase Rate. Generally, these loans are for short durations up to two weeks.
Reverse repo rate
Reverse repo rate is the rate of interest offered by the RBI when banks deposit their surplus funds with it for short periods. When banks have surplus funds but have no lending (or) investment options, they deposit such funds with the RBI. Banks earn interest on such funds.