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RBI keeps repo rate unchanged at 6%
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The policy announcement on 5th April, 2018: Neutral stance
The Reserve Bank of India (RBI) kept its policy rates on hold for the fourth straight meeting on 5th April, 2018 and retained its “neutral” stance even as inflationary pressures have eased more than expected.
RBI's Monetary Policy Committee - the voting pattern
The RBI’s Monetary Policy Committee (MPC) chose to maintain status quo and retain its key policy rate, the repo rate at 6 per cent, in its first bi-monthly meeting for the new fiscal. The 6-member committee voted 5:1 for the decision. Chetan Ghate, Pami Dua, Ravindra H. Dholakia, Viral V. Acharya and Urjit R. Patel voted in favour of the monetary policy decision. Only Michael Debabrata Patra voted for an increase in the policy rate of 25 basis points.
All about inflation:
The decision comes against the backdrop of easing inflation numbers in the recent past. The Consumer price index (CPI) had fallen to 4.4 per cent in february from 5.01 per cent in January. This is, however, expected to move up soon as the base effect wears off and due to other factors such as oil prices moving up and higher minimum support prices to be announced soon following budget commitments.
In a key development, the RBI's MPC has lowered its inflation projections for the coming fiscal. In its last policy it had projected inflation in the first half of the fiscal to be around 5.1 per cent to 5.6 per cent. It has now projected inflation to be between 4.7 per cent and 5.1 per cent in the first half.
On its projection for Gross Value Added (GVA), the MPC seemed to strike a more optimistic note and expected it to strengthen from 6.6 per cent to 7.4 per cent for the new fiscal. At its earlier policy meeting in February it had projected GVA would be around 7.2 per cent for the first half of the new fiscal.
Agents of inflation:
The MPC flagged its usual concerns about inflation.
- First, the revised formula for MSP as announced in the Union Budget 2018-19 for kharif crops may have an impact on inflation, although the exact magnitude will be known only in the coming months.
- Second, the staggered impact of HRA revisions by various state governments may push headline inflation up. While the statistical impact of the HRA revisions will be looked through, there is a need to watch out for any second round effects.
- Third, in case there is any further fiscal slippage from the Union Budget estimates for 2018-19 or the medium-term path, it could adversely impact the outlook on inflation. There are also risks to inflation from fiscal slippages at the level of states on account of higher committed revenue expenditure.
- Fourth, should the monsoon turn deficient temporally and/or spatially, it may have a significant bearing on food inflation. Fifth, firms polled in the Reserve Bank’s Industrial Outlook Survey expect input and output prices to rise , going forward. Sixth, recent volatility in crude prices has imparted considerable uncertainty to the near-term outlook."
Repo rate: Repo rate is the rate at which RBI lends to its clients generally against government securities. A decrease in Repo rate helps the commercial banks to get money at a cheaper rate and increase in Repo rate discourages the commercial banks to get money as the rate increases and becomes expensive.
Reverse Repo rate: Reverse Repo rate is the rate at which RBI borrows money from the commercial banks. The increase in the Repo rate will increase the cost of borrowing and lending of the banks which will discourage the public to borrow money and will encourage them to deposit.
Statutory liquidity ratio: Statutory liquidity ratio is the Indian government term for reserve requirement that the commercial banks in India require to maintain in the form of gold, government approved securities before providing credit to the customers.
Liquidity Adjustment Facility: LAF is used to aid banks in adjusting the day to day mismatches in liquidity. LAF helps banks to quickly borrow money in case of any emergency or for adjusting in their SLR/CRR requirements. LAF consists of repo and reverse repo operations.
Marginal Standing Facility (MSF): Banks borrow from the central bank by pledging government securities at a rate higher than the repo rate under liquidity adjustment facility or LAF in short. The MSF rate is pegged 100 basis points or a percentage point above the repo rate. Under MSF, banks can borrow funds up to one percentage of their net demand and time liabilities (NDTL).