The Reserve Bank of India (RBI) kept the key policy rate, or the repo rate, unchanged in the first bimonthly policy review of 2017-18 but narrowed the policy corridor by 25 bps by raising the reverse repo rate to 6%, from 5.75%.
All six members of the monetary policy committee (MPC) - which decides interest rates - voted in favour of the decision.
The central bank said the policy decision was consistent with the neutral policy stance with the objective of achieving the medium-term target for retail inflation, which is 4%.
The MPC saw the path of inflation in 2017-18 challenged by upside risks and unfavourable base effects towards the second half of the year.
Accordingly, inflation developments have to be closely monitored with food price pressures can be checked so that inflation expectations can be anchored.
The central bank indicated the future course of monetary policy would largely depend on incoming data on how macroeconomic conditions are evolving.
While the repo rate action was in line with market expectations, the governor’s hawkish tone disappointed bond traders who were expecting a softer tone.
Yield on the 10-year benchmark bond hardened to 6.77% as compared with its previous close of 6.65%.
The central bank has set its inflation projection to an average of 4.5% in the first half of 2017-18 and 5% in the second half, while keeping its GVA growth projection unchanged at 7.4% for FY18 as compared with 6.7% in FY17.
Surplus liquidity in the banking system had fallen from close to ?8 lakh crore in January to ₹4.8 lakh crore in March.
A standing deposit facility to the government in November 2015, was proposed approval for which was still awaited.
SDF is a mechanism to drain surplus cash at a rate lower than the repo rate without the need for any collateral.
Key Takeaways from RBI Monetary Policy review:- RBI is optimistic about growth in FY18 and has projected Gross Value Added (GVA) growth to be 7.4 percent as against 6.7 percent last year.
- Inflation has been projected to be between 4.5-5 percent for the year with some caution being posted on the monsoon progress.
- RBI has lowered the corridor around the repo rate.
- RBI has not quite said anything specific about Non-performing assets (NPAs) but will be coming out with another paper on prompt corrective action which addresses some of the issues.
- RBI has put forward a proposal to set up a standing deposit facility to the government whereby banks can park their surplus funds with the RBI without bonds as securities.
- The Reserve Bank of India, in its first monetary policy review of financial year 2017-18, kept the repurchase (repo) rate unchanged at 6.25%, citing upward risks to inflation and global uncertainty.
- The Monetary Policy Committee, however, raised the reverse repo rate by 0.25 basis points to 6%, and cut the marginal standing facility (MSF) rate to 6.5%.
