Monetary Policy Committee Current Affairs

RBI Keeps the Repo Rate Unchanged

The Reserve Bank of India has kept repo rate unchanged at 6.25% in its second bi-monthly monetary policy review.

Reverse Repo rate has been kept unchanged at 6%.

The RBI has cut the Statutory Liquidity Ratio (SLR) by 50 basis points to 20%.

RBI has projected the headline inflation in the range of 2.0-3.5% in the first half of 2017-18 and 3.5-4.5% in the second half. According to the central bank, the implementation of GST is not expected to have material impact on overall inflation. It has observed that the 7th Pay Commission allowances, geo political, financial risk pose upside risk to inflation.

RBI has reduced the growth projection for the current fiscal to 7.3% from 7.4%.

The monetary policy decision has been taken by the six-member monetary policy committee (MPC).

The RBI has also revised its target for gross value added (GVA) by 10 basis points to 7.3%.

Background

SLR is the portion of bank deposits that have to be invested in government bonds. Components of SLR include cash in hand, gold owned by the bank, balance with RBI, Net balance in current account & Investment in Government securities. SLR has to be maintained at the close of business on every day.

Repo rate, or repurchase rate, is the rate at which RBI lends to banks for short periods. This is done by RBI buying government bonds from banks with an agreement to sell them back at a fixed rate. The objective of Repo is to inject liquidity in the system. If RBI wants to make it more expensive for banks to borrow money, it increases the repo rate. Similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate.
Reverse repo rate is the rate of interest at which the RBI borrows funds from other banks in the short term. This is done by RBI selling government bonds / securities to banks with the commitment to buy them back at a future date.
GVA is another measure for economic growth.

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RBI keeps repo rate unchanged in first monetary policy review of 2017-18

The Reserve Bank of India (RBI) in its first bimonthly monetary policy review of the financial year 2017-18, has kept the key policy rate, the repo rate unchanged, but raised reverse repo rate by 25 bps to 6%, from 5.75%.

Decision in this regard was taken by monetary policy committee (MPC) —which decides interest rates and all six members of the MPC voted in favour of the decision.

Policy Rates

  • Repo rate: It is the rate at which RBI lends to its clients generally against government securities. It was unchanged at 25%.
  • This was the third successive quarterly review in which the RBI has kept its repo rate unchanged at 6.25%.
  • Reverse Repo Rate: It is the rate at which banks lend funds to the RBI. It was raised the Reverse Repo (RR) rate by 25 bps to 6%.
  • Marginal Standing Facility (MSF) Rate: It is rate at which the scheduled banks can borrow funds overnight from RBI against government securities. It is a very short term borrowing scheme for scheduled banks. It was cut to 5%.
  • Bank Rate: It is rate charged by the central bank for lending funds to commercial banks. It was set to 5%.
  • It influences lending rates of commercial banks. Higher bank rate will translate to higher lending rates by the banks.
  • Cash Reserve Ratio (CRR): It is the amount of funds that the banks have to keep with the RBI. It was unchanged at 4%. The RBI uses the CRR to drain out excessive money from the system.
  • Statutory Liquidity Ratio (SLR): It was unchanged 20.50%. It is amount that banks have to maintain a stipulated proportion of their net demand and time liabilities (NDTL) in the form of liquid assets like cash, gold and unencumbered securities, treasury bills, dated securities etc.
Key Facts
  • The policy decision taken by RBI was consistent with its neutral policy stance with the objective of achieving the medium-term target for retail inflation i.e. 4%.
  • The RBI held that the future course of monetary policy would largely depend on incoming data on how macroeconomic conditions are evolving.
  • It has set its inflation projection to an average of 4.5% in the first half of 2017-18 and 5% in the second half. It has kept GVA growth projection unchanged at 7.4% for FY18 as compared with 6.7% in FY17.
  • The central bank also allowed banks to invest in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) in a bid to spur investments in core infrastructure sectors.

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