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RBI keeps repo rate unchanged at 6.25%, hikes reverse repo to 6%

07 Apr 2017 Evaluate

The six-member monetary policy committee (MPC), headed by Reserve Bank of India (RBI)  Governor Urjit Patel, has kept the policy rate under the liquidity adjustment facility (LAF) unchanged at 6.25 percent, shifting focus to ways to mop up excess cash in the banking system that threatens to stoke inflation. It revised the reverse repo rate upward by 25 basis points to 6 percent. Also, the Marginal Standing Facility (MFS) has been revised by 25 basis points to 6.5 percent. MSF is RBI's lending rate for banks against government securities.

In its first bi-monthly monetary policy review of 2017-18 RBI said that all the six members of the MPC voted in favour of the decision. RBI governor said that liquidity management has become important now to contain inflation, which faces more upside risks due to monsoon uncertainty and the impact of the Seventh Pay commission on housing allowances and the GST implementation. The RBI has projected retail inflation to average 4.5 percent in the first half of the year and 5 percent in the second half, citing risks of El Nino impacting the monsoon and one-off effects of the Goods and Services Tax (GST).

Moreover, the central bank said that Gross Domestic Product (GDP) growth will be at 7.4 percent for the current fiscal, up from 6.7 percent in 2016-17. It also said that with progressive remonetisation, the surplus liquidity in the banking system has declined from a peak of Rs 7,956 billion on January 4, to an average of Rs 6,014 billion in February and further down to Rs 4,806 billion in March. Currency in circulation expanded steadily during this period. Its impact on the liquidity overhang was, however, partly offset by a significant decline in cash balances of government up to mid-March which released liquidity into the system.


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