Friday, 22 February, 2019

RBI keeps repo rate unchanged at 6.25%

RBI Governor Urjit Patel RBI Governor Urjit Patel
Nellie Chapman | 10 April, 2017, 02:05

The RBI also announced a 25 basis point rise in the reverse repo rate to 6.00 percent, narrowing the gap between the repo and the reverse repo. "Headline CPI (consumer price index) inflation is set to undershoot the target of 5.0 percent for Q4 of 2016-17 in view of the sub-4 percent readings for January and February".

Mumbai: The Reserve Bank of India (RBI) on Friday released a discussion paper seeking comments on a new category of banks-wholesale and long-term finance banks that will fund large projects.

The repo rate is at 6.25 per cent now, while the RBI has changed its stance to "neutral" from "accommodative", indicating pause in a rate-cutting cycle.

The Marginal Standing Facility has been revised downwards (rpt) downwards by 0.25 per cent to 6.5 per cent, the central bank said in the first bi-monthly monetary policy review of 2017-18.

"The market was expecting a neutral to dovish stance but the policy was slightly hawkish", said Harish Agarwal, a fixed income trader with First Rand Bank.

"Even as faced with a big challenge of ma " aging excess liquidity following demonetization, the RBI has rightly not really gone overboard and resorted to much feared measures like hike in Cash Reserve while leaving the policy interest rates unchanged is on the expected lines", industry body Assocham said in a statement.

Banks, it said, have scope to further lower borrowing costs as "a more complete transmission of policy impulses remains, including for small savings/administered rates".

The government nominees on the Committee are Chetan Ghate, professor at the Indian Statistical Institute; Pami Dua, Director, Delhi School of Economics and Ravindra H Dholakia, professor at IIM-Ahmedabad, while RBI nominees are the Governor, Deputy Governor in-charge of monetary policy Viral A Acharya and Executive Director.

The state of the global economy is also weighing heavily within the RBI, as the U.S. Federal Reserve's tightening gives additional pause to central banks around Asia, with Australia this week becoming the latest one to hold rates.

On Thursday, the RBI had kept the repurchase rates (the rate at which banks borrow from RBI) under the Liquidity Adjustment Facility unchanged at 6.25 %.

Meanwhile, the focus would be to continue to nudge banks to cut lending rates.

In the last policy review on February 8, RBI had kept key interest rate on hold at 6.25 per cent.

First, the RBI is sanguine about growth in FY18 and has projected Gross Value Added (GVA) growth to be 7.4 percent as against 6.7 percent previous year.

But this does not necessarily mean that as inflationary pressures risk, the RBI will act with rate action. "The RBI expects an increasing inflation trajectory and they seem to be adequately preparing for an improving capex cycle and well as liquidity lowering measures in the United States". Capital Economics is flagging the possibility of a hike in benchmark rates before the end of 2017, while Nomura Holdings Inc. says risks are skewed toward an increase in 2018.

Fourth, the RBI has not quite said anything specific about Non-performing assets (NPAs) but will be coming out with another paper on prompt corrective action which addresses some of the issues.