Monetary Policy Current Affairs

RBI keeps repo rate unchanged at 6%

The six member Monetary Policy Committee (MPC) of Reserve Bank of India (RBI) has decided to maintain status quo in policy rates by keeping repo rate unchanged at 6.0% under liquidity adjustment facility (LAF).

It was RBI’s fifth bimonthly policy review for financial year 2017-18. The decision was in line with market expectations and consistent with neutral stance of monetary policy in consonance with objective of achieving medium-term inflation target of 4% within a band of +/- 2%, while supporting growth.

Policy Rates

Repo rate: It is rate at which RBI lends to its clients generally against government securities. It was unchanged at 6%.

Reverse Repo Rate: It is rate at which banks lend funds to RBI. It was unchanged at 5.75%.

Marginal Standing Facility (MSF) Rate: It is rate at which scheduled banks can borrow funds overnight from RBI against government securities. It is very short term borrowing scheme for scheduled banks. It was unchanged at 6.25%.

Bank Rate: It is rate charged by central bank for lending funds to commercial banks. It was unchanged 6.25%. It influences lending rates of commercial banks. Higher bank rate will translate to higher lending rates by banks.

Cash Reserve Ratio (CRR): It is amount of funds that banks have to keep with RBI. It was unchanged at 4%. The RBI uses CRR to drain out excessive money from system.

Statutory Liquidity Ratio (SLR): It was changed to 19.5% from 20%. It is amount that banks have to maintain a stipulated proportion of their net demand and time liabilities (NDTL) in form of liquid assets like cash, gold and unencumbered securities, treasury bills, dated securities etc.

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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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