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RBI Monetary Policy Review: RBI keeps repo rate unchanged at 6.25%, raises reverse repo rate to 6%

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On 6th April 2017, Reserve Bank of India (RBI) announced First Bi-Monthly Monetary Policy Statement for financial year 2017-18. This is the third straight meeting wherein the Policy Repo Rate has been kept unchanged.

Post the First Bi-Monthly Monetary Policy Statement announcement, the policy rates and reserve ratios are as follows:

Policy Repo Rate 6.25% Unchanged  – since 4th October 2016
Reverse Repo Rate 6.00% Hiked by 25 basis points. Earlier it was 5.75%
Marginal Standing Facility Rate 6.50% Reduced by 25 basis points. Earlier it was 6.75%
Bank Rate 6.50% Reduced by 25 basis points. Earlier it was 6.75%
Cash Reserve Ratio (CRR) 4.00% Unchanged – since 9th February 2013
Statutory Liquidity Ratio (SLR) 20.50% Effective from 1st January 2017

Highlights of RBI’s First Bi-Monthly Monetary Policy Statement:

  • RBI expects inflation to average at 4.5% for first half of 2017-18 and at 5% for the second half.
  • Consumer Price Index (CPI) inflation to average at 4.5% for first half of 2017-18 and at 5% for the second halfRBI Monetary Policy Review
  • An upside risk to inflation is perceived owing to El Nino effect on Indian monsoons thereby spiking food inflation, implementation of 7th Central Pay Commission and initial jolt from implementing Goods and Services Tax
  • GDP growth has been forecasted at 7.4% for current fiscal as compared to 6.7% in 2016-17.
  • Gross Value Added (GVA) growth has been forecasted at 7.4% for current fiscal as compared to 6.7% in 2016-17.
  • Remonetisation efforts will give a boost to consumer spending. Measures announced in Union Budget 2016-17 will positively impact the domestic economic sentiment.
  • Global growth indicators are indicating strong activity in Advanced Economies (AEs), whereas effect of slowdown which hit Emerging Market Economies (EMEs) in 2016 appears to be receding.
  • All six members of Monetary Policy Committee voted in favour of this monetary policy decision.

Next meeting of Monetary Policy Committee is scheduled on 5th and 6th June 2017.

Brief Explanation of related terms:

  • Repo Rate: Rate at which RBI lends short term funds to commercial banks
  • Reverse Repo rate: Rate at which RBI borrows from commercial banks
  • Marginal Standing Facility: Kind of an emergency window through which commercial banks can borrow from RBI by pledging approved securities. This rate is higher than Repo Rate
  • Bank Rate: Also referred to as discount rate. This rate is applicable on loans and advances (long term) made to commercial banks by RBI. This rate influences commercial banks’ lending rates to public.
  • Cash Reserve Ratio: Percentage of total deposits which commercial banks have to keep with RBI.
  • Statutory Liquidity Ratio: Percentage of net demand and time liabilities which commercial banks have to maintain in form of liquid assets such as cash, gold and other approved securities/instruments.