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RBI keeps lending rate unchanged at 6.25%

For the second time in a row, the Reserve Bank on Wednesday opted for a status quo in its key rates but shifted the stance of the monetary policy from ‘accommodative’ to ‘neutral’.

“The decision of the Monetary Policy Committee is consistent with a neutral stance of monetary policy in consonance with the objective of achieving consumer price index inflation at 5 per cent by Q4 of 2016-17 and the medium-term target of 4 per cent within a band of +/- 2 per cent, while supporting growth,” it said.

Accordingly, the repo rate at which it lends to the system stands at 6.25 per cent and the reverse repo rate at which it absorbs excess liquidity is also retained at 5.75 per cent.

The monetary policy committee said it is “committed to bringing headline inflation closer to 4.0 per cent on a durable basis and in a calibrated manner” and this requires further “significant decline in inflation expectations, especially since the services component of inflation that is sensitive to wage movements has been sticky.

“The committee decided to change the stance from accommodative to neutral while keeping the policy rate on hold to assess how the transitory effects of demonetisation on inflation and the output gap play out,” the resolution of the Monetary Policy Committee said.

In the last policy review in December, RBI had decided to keep policy rate unchanged.

RBI also revised down its gross value added growth projection down to 6.9 per cent for FY2016-17 from 7.4 per cent earlier, but added that it will pick up sharply to 7.4 per cent in FY2017-18.

The central bank also decided to form a separate enforcement department for stricter enforcement of its regulatory and supervisory actions.

At 6.25 per cent, the repo rate is already at a six-year low.

A majority of analysts in all pre-policy polls had said that RBI will go for a 0.25 percentage point cut in its key rates at the review. The analyst community, was however, not so sure of such actions further.

The factors which were pushing the case for a rate cut included inflation being under control at 3.3 per cent for December and under 4 per cent mark in January, pushing growth prospects after the demonetisation impact and also a commitment from the government to keep the fiscal deficit at 3.2 per cent for next fiscal.

However, core inflation staying put and not showing signs of decline, a possible increase in oil prices following decisions by the OPEC and further hardening of rates in the US were some of the factors that prevented RBI from lowering the lending rate.

The Reserve Bank is targeting to get headline inflation at 5 per cent by March 2017, but the targets after that were unclear. It is mandated to ensure the inflation comes under the 2-6 per cent band and is working towards achieving the median 4 per cent level.

Source: Rediff