The Reserve Bank of India in its bi-monthly monetary policy review announced that it will not change key rates. The repo rate will remain unchanged at 6 per cent and the reverse repo rate will remain at 5.75 per cent. The Central bank revised the growth projection down from 7.3 per cent to 6.7 per cent.
All eyes were on the RBI to see whether the central bank cuts key lending rates on Wednesday. Industry bodies had demanded a cut in rates while India’s biggest lender State Bank of India had speculated the status quo to maintain. After a five quarter slide, the GDP growth rate hit a three year low during the June quarter at 5.7 per cent. The government and industry bodies were looking to the RBI for some relief to drive growth and investment in the private sector, especially with inflation figures relatively low.
The RBI changed standard liquidity ratio (SLR) by 50 basis points from 20 per cent to 19.5 per cent. SLR describes the ratio of reserve required by a commercial bank before providing creditor to creditors. The reserve has to be maintained in the form of gold, government approved securities etc. The marginal standing facility (MSF) rate and bank rate also remain unchanged at 6.25 per cent.
RBI governor Urjit Patel, while reading out the monetary policy statement, said that inflation is expected to rise from its current level and range between 4.2-4.6 per cent in the second half of 2017, including house rent allowance by the Centre. CPI inflation has increased by 2 per cent.
The monetary policy committee said in its statement said: “The decision of the MPC 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 bank of +/- 2 per cent, while supporting growth.”
Repo rate is the rate at which the RBI lends money to commercial banks when they require funds. RBI’s lending to banks is usually done through repos (repurchase agreements) for short term lendings against against securities. Reverse Repo Rate is the rate at which the RBI borrows money from commercial banks in India. It is used to control liquidity in the market.
In the event of rising inflation, increase in repo rate provides disincentives to commercial banks from borrowing from the RBI. This reduces supply of money in the economy and helps the RBI in, to some degree, control inflation. If the inflation pressure and risk is on the downslide, a rate cut could provide incentive for banks to borrow from banks and allowing greater supply of money and larger capacity for investment and economic activity.
The repo rate cut in August had brought down to the lowest since November 2010. The reverse repo rate currently is 5.75 per cent.
In the event of inflation, central banks increase repo rate as this acts as a disincentive for banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in arresting inflation.
The central bank takes the contrary position in the event of a fall in inflationary pressures. Repo and reverse repo rates form a part of the liquidity adjustment facility.
In the last monetary policy review, the RBI slashed the repo rate by 25 basis points to 6 per cent. One basis point represents 0.01 per cent. It was the first cut after a period of 10 months. During August, though, the retail inflation jumped to a then five-month high at 3.36 per cent and in July the consumer price index (CPI) was recorded at 2.36 per cent.
The government had expected a cut in the policy rate in order to boost growth in a slowing economy. India Inc had also invoked the RBI for a cut in rates to boost the private sector.
The Confederation of Indian Industries (CII) sought a cut of 100 basis points to help drive growth and investment in the private sector. “I strongly recommend that there should be a 100 basis points rate cut. We need out of the box thinking. We all talk that the private sector investments should come in and we want the economy to pick up on a high growth trajectory,” CII Director General Chandrajit Banerjee told PTI.
Assocham also advocated rate cut by much as 50 basis points. “At least 50 basis points elbow room can be taken with regard to 3.2% fiscal deficit for the current year and the next financial year,” Assocham said.
According to a PTI, India’s largest lender State Bank of India said that the RBI is likely to maintain status quo on the key lending rate in today’s policy review as it is “stuck in a conundrum” of low growth, mild inflation and global uncertainties. Making the statement on the back of flexible inflation targeting, the SBI had said the choice before the RBI was moving towards the 4% inflation target or staying within the inflation band of plus/minus 2 per cent.