RBI keeps repo rate unchanged at 6.25%, cuts SLR by 0.5% to 20%

08 Jun 2017 Evaluate

In a much anticipated move, the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC), kept key interest rates unchanged for the fourth time in a row, but softened its hawkish stance owing to the fall in retail inflation to a record low and lower-than-expected economic growth. It also raised concerns over fiscal slippages in view of rush for farm loan waivers.

The fifth meeting of MPC maintained the repo rate, at which it lends to the banks, at 6.25 percent and the reverse repo, at which it borrows, at 6 percent. It also maintained status quo for the second bi-monthly monetary policy for 2017-18. CRR or Cash Reserve Ratio - which is a portion of deposits that banks must mandatorily keep with the RBI, also remained unchanged at 4 percent. It however slashed the Statutory Liquidity Ratio (SLR) or the percentage of deposits that banks have to park in government securities, by 0.5 per cent to 20 percent, a move that will help infuse more liquidity into the banking system.

The central bank also projected that inflation will remain in the 2 to 3.5 percent range for the first half of 2017-18 and in the 3.5 to 4.5 percent for second half. The RBI in its monetary policy review also cut growth projection for current fiscal to 7.3 per cent from 7.4 per cent. The growth of real gross value added (GVA) for 2016-17 has been pegged at 6.6 percent, 0.1 percentage point lower than the second advance estimates released in February 2017.

Although, the central bank said that it does not expect the implementation of Goods and Services Tax (GST) to have a material impact on overall inflation. GST is touted as the largest tax reform since India's independence in 1947 and aims to bring India under a unified tax regime moving away from the current system where various central and state taxes are levied on goods and services.

Separately, the RBI reduced the standard asset provisioning requirement for home loans from 0.4% to 0.25% - a move which will prompt banks to push such loans by reducing interest rates and risk weight on such loans has also been rationalised.

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