Published: Fri, December 08, 2017
Economy | By Shawn Conner

RBI keeps repo rate unchanged at 6%, maintains neutral policy stance

RBI keeps repo rate unchanged at 6%, maintains neutral policy stance

The RBI on Wednesday retained the repo rate at 6 basis points in its fourth bi-monthly monetary policy review of 2017-18.

The central bank also warned state-run banks that capital infusions recently announced by the government would be based strictly on merit - lenders won't get money unless they clean up their act. The cash reserve ratio (CRR) too has been left unchanged at 4%.

As widely expected, RBI maintained a status quo on policy rates citing its neutral monetary policy stance and objective of achieving the medium-term target for consumer price inflation (or CPI) of 4 per cent within a band of +/- 2%, while supporting growth. The uptick in the GDP (Gross Domestic Product) numbers for the September quarter - after seeing continuous decline for five quarters - eased pressure on the RBI to lower the monetary policy rates.

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"After the in-line RBI policy, Indian market shifted its focus towards the global market, which was under the negative trend".

The BSE auto index settled lower by 0.73 per cent at 24,591.

Mumbai: Market benchmark Sensex fell 218 points to quote at 32,584.66 in late afternoon trade on Wednesday soon after the Reserve Bank kept the policy rate unchanged at 6 per cent but raised the inflation forecast.

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"Keeping in mind the output gap dynamics, the MPC made a decision to continue with the neutral stance and watch the incoming data carefully", the RBI said in a statement. The main considerations underlying the decision are set out in the statement below. RBI governor Urjit Patel said a principle of "reform and recapitalisation" would be followed to ensure that mistakes of the past are not repeated.

In our view, interest rates on short term debt instruments are expected to remain range bound and close to LAF rates, given low probability of repo rate cut for the rest of FY 2018 and a close to neutral liquidity situation.

Higher yields also impact banks' earnings because of statutory liquidity ratio (SLR), or the proportion of deposits that banks need to invest in government bonds. As the interest rate setting mechanism used by banks continues to evolve, it would benefit retail and corporate borrowers thereby boosting the economy as a whole. This is called as cost of credit (the rate at which we borrow the money). The rate at which banks borrow money from the RBI by selling their surplus government securities to the central bank is known as "Repo Rate".

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