RBI keeps lending rate unchanged at 6.25%
For the second time in a row, the Reserve Bank of India has opted for a status quo in its key rates but shifted the stance of the monetary policy from 'accommodative' to 'neutral'
In its first monetary policy review in 2017, on February 8, the Reserve Bank of India (RBI) has decided to keep key rates unchanged.
Accordingly, the repo rate at which it lends to the system stands at 6.25% and the reverse repo rate at which it absorbs excess liquidity is also retained at 5.75%. In the last policy review in December, the RBI had decided to keep policy rate unchanged. At 6.25%, the repo rate is already at a six-year low.
The Monetary Policy Committee (MPC) also decided to change the stance from ‘accommodative’ to ‘neutral’ while keeping the policy rate on hold, to assess how the transitory effects of demonetisation on inflation and the output gap play out.
“The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving consumer price index (CPI) inflation at 5% by Q4 of 2016-17 and the medium-term target of 4% within a band of +/- 2%, while supporting growth,” it said. The MPC said it is ‘committed to bringing headline inflation closer to 4.0% on a durable basis and in a calibrated manner’ and this requires further ‘significant decline in inflation expectations, especially since the services component of inflation that is sensitive to wage movements has been sticky’.
RBI governor Urjit Patel also cut the economic growth forecast to 6.9% for the current fiscal, from 7.1% estimated earlier, even as he said that the economy will bounce back to 7.4% next fiscal. The central bank also decided to form a separate enforcement department for stricter enforcement of its regulatory and supervisory actions.
A majority of analysts in all pre-policy polls had said that RBI will go for a 0.25 percentage point cut in its key rates at the review. The factors which were pushing the case for a rate cut included inflation being under control at 3.3% for December and under 4% in January, pushing growth prospects after the demonetisation impact and also a commitment from the government to keep the fiscal deficit at 3.2% for the next fiscal. However, core inflation staying put and not showing signs of decline, a possible increase in oil prices following decisions by the OPEC and further hardening of rates in the US, were some of the factors that prevented the RBI from lowering the lending rate.
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