RBI Monetary Policy Review: Key rate unchanged at 6.25% as inflation, liquidity weigh

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Updated: April 6, 2017 2:58:56 PM

With the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.25%, the reverse repo rate under the LAF now stands at 6%, and the marginal standing facility (MSF) rate at 6.5%. (Image: Reuters)

The Reserve Bank of India on Thursday kept the key policy rate unchanged at 6.25% for the third time in a row and also maintained the policy stance at ‘neutral’, but narrowed the policy rate corridor to 75 basis points by raising the reverse repo rate and cutting the marginal standing facility rate.

With the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.25%, the reverse repo rate under the LAF now stands at 6%, and the marginal standing facility (MSF) rate at 6.5%.

The decision to keep the repo rate unchanged was in line with the expectations, but raising the reverse repo rate was unexpected.

“The decision of the MPC (Monetary Policy Committee) 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,” Reserve Bank of India said in its first bi-monthly monetary policy statement for the current financial year 2017-18.

The inflation weighed in on the mind of the RBI. “After moderating continuously over the last six months to a historic low, retail inflation measured by year-on-year changes in the consumer price index (CPI) turned up in February to 3.7 per cent,” it said, adding, “While food prices bottomed out at the preceding month’s level, base effects pushed up inflation.”

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Further, as for the economic growth, it said, “On the domestic front, the Central Statistics Office (CSO) released its second advance estimates for 2016-17 on February 28, placing India’s real GVA growth at 6.7 per cent for the year, down from 7 per cent in the first advance estimates released on January 6.”

While India’s CPI inflation (consumer price index) inflation has remained below the RBI’s medium-term target of 4%, the recent rise may have made the central bank a little cautious. The CPI inflation had picked up pace in February to 3.65%, after slowing in the previous month to 3.17%. In the last monetary policy review in February, the RBI had said that it expected inflation to accelerate as quick remonetisation would lead to excess liquidity in the system.

RBI kept the policy stance unchanged at ‘neutral’. “the MPC decided to keep the policy rate unchanged in this review while persevering with a neutral stance. The future course of monetary policy will largely depend on incoming data on how macroeconomic conditions are evolving,” it said.

In two consecutive surprise moves, the RBI had kept the repo rate unchanged in the fifth bi-monthly monetary policy statement for 2016-17 on December 7, and the sixth review in February.

RBI had implemented a new framework in the form of a six-member Monetary Policy Committee, effective since October last year, to decide the credit and monetary policy. Three members of the committee are from the RBI, and the other three are appointed by the Central government.

 

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