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RBI keeps repo rate unchanged at 6.25%

LiveMint logoLiveMint 06-04-2017 Gopika Gopakumar

Mumbai: The Reserve Bank of India’s monetary policy committee (MPC) voted unanimously to raise the reverse repo rate—the rate at which sucks out excess liquidity from the system—by 25 basis points to 6%. The repo rate, however, has been kept unchanged at 6.25%. 

The panel noted that risk to the inflation trajectory are evenly balanced at the current juncture. The main upside risks come from the uncertainty surrounding the monsoon rains, the implementation of the seventh central pay commission award, and one-off effects from the goods and services tax. Consequently, it voted to keep the policy rate (repo rate) unchanged while “persevering with a neutral stance,” the panel’s statement said. 

Wholesale inflation soared to a 39-month high of 6.55% while retail inflation too inched up to 3.65% in February, signalling that inflation continues to be a concern for the regulator. Majority of economists therefore expect no further rate cuts this financial year. 

“The future course of monetary policy will largely depend on incoming data on how macroeconomic conditions are evolving. Banks have reduced lending rates, although further scope for a more complete transmission of policy impulses remains, including for small savings/administered rates,” the statement said. 

“It is in this context that greater clarity about liquidity management is being provided, even as surplus liquidity is being steadily drained out,” it added. 

The hike in the reverse repo comes as a surprise as most economists had also expected RBI to introduce a Standing Deposit Facility (SDF) to help drain surplus cash from the system without the need for any collateral. This facility, which was first mooted by the Urjit Patel committee on monetary policy reform released in January 2014, allows banks to park their excess liquidity with the central bank with the exception that it does not have to provide any collateral in exchange. 

The RBI has maintained the growth forecast for FY18 at 7.4% while it has pared its forecast for FY16-17 at 6.7% compared to 6.9% in the February policy review.

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