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Monetary Policy Committee meeting: Repo rate kept steady at 6.25%, reverse repo hiked by 25 bps

MPC’s call to wait out unravelling of effects of demonetisation has been broadly borne out: RBI Governor

By: ENS Economic Bureau | Mumbai |
April 7, 2017 12:57:55 am
RBI, reserve bank of india, repo rate, reverse repo rate, banking news, finance news, economy news, indian express (From left) RBI Deputy Governor Viral Acharya, Executive Director Michael Patra, Governor Urjit Patel, Deputy Governor SS Mundra, Deputy Governor BP Kanungo, Deputy Governor N S Vishwanathan in Mumbai on Thursday. Nirmal Harindran

The six-member Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on Thursday voted unanimously to leave the main policy rate, the repo rate — the rate at which banks borrow — unchanged at 6.25 per cent maintaining its neutral policy stance with a commitment to lowering inflation to 4 per cent in the medium term.

However, the RBI surprised bankers and analysts by narrowing the policy corridor to 50 bps from 100 bps in a move aimed at anchoring the weighted average call rate closer to the policy repo rate. The RBI raised the reverse repo rate — the rate at which banks lend funds to the RBI — by 25 bps to 6 per cent and cut the marginal standing facility (MSF) rate and the bank rate by 25 bps to 6.50 per cent.

Unveiling the bi-monthly monetary policy, the RBI said that it expects liquidity to moderate over the next three to four quarters and it will manage surplus liquidity using a combination of its market stabilisation scheme, longer tenor variable reverse repos and open market operations. It is also awaiting a decision from the government on the Standing Deposit Facility (SDF), an uncollateralised liquidity absorption facility, its preferred measure to absorb surplus liquidity.

According to RBI Governor Urjit Patel, overall, the MPC’s considered judgement call to wait out the unravelling of the transitory effects of demonetisation has been broadly borne out. “While these effects are still playing out, they are distinctly on the wane and should fade away by the Q4 of 2016-17,” he said.

While inflation has ticked up in its latest reading, its path through 2017-18 appears uneven and challenged by upside risks and unfavourable base effects towards the second half of the year. “Moreover, underlying inflation pressures persist, especially in prices of services. Input cost pressures are gradually bringing back pricing power to enterprises as demand conditions improve. The MPC stays committed to bringing headline inflation closer to 4 per cent on a durable basis and in a calibrated manner,” Patel said.

Accordingly, Patel said, inflation developments have to be closely and continuously monitored, with food price pressures kept in check so that inflation expectations can be re-anchored.

“At the same time, the output gap is gradually closing. Consequently, aggregate demand pressures could build up, with implications for the inflation trajectory. Against this backdrop, the MPC decided to keep the policy rate unchanged in this review while persevering with a neutral stance,” Patel said.

“The future course of monetary policy will largely depend on incoming data on how macroeconomic conditions are evolving. Banks have reduced lending rates, although further scope for a more complete transmission of policy impulses remains, including for small savings/administered rates. It is in this context that greater clarity about liquidity management is being provided, even as surplus liquidity is being steadily drained out,” he said.

On bad loans, Patel said, “along with rebalancing liquidity conditions, it will be the Reserve Bank’s endeavour to put the resolution of banks’ stressed assets on a firm footing and create congenial conditions for bank credit to revive and flow to productive sectors of the economy.”

Arundhati Bhattacharya, chairman, SBI, said that “keeping the repo rate on hold was on expected lines, even though reverse repo rate was hiked to 6 per cent. Elsewhere, on the developmental and regulatory policies front, RBI has announced a number of measures notably, substitution of collateral under LAF, allowing banks to invest in REITs and financial literacy; all these will go a long way in improving the system.”

According to Chanda Kochhar, MD and CEO, ICICI Bank, the RBI’s clear articulation on liquidity management is welcome and would ensure stability in markets by enforcing the sanctity of the operating rate while addressing temporary liquidity imbalances.

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