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09 Feb 2017

Repo rate unchanged at 6.25%, monetary policy 'neutral'

The rupee closed at a three-month peak of 67.19, and Sensex fell by 45.24 points after the RBI kept repo rate unchanged at 6.25%.

Citing global uncertainties and the need to be flexible in an uncertain economic environment, RBI also changed stand on monetary policy from "accommodative" to "neutral".

It is likely that there will be no repo rate cuts in the near term.

In context

Bonds dive after RBI keeps rates unchanged

What is a repo rate?

The rate at which the Reserve Bank of India (or the central bank of a country) lends money to commercial banks during fund shortage is called repo rate. Higher repo rate results in banks charging a higher interest rate on loans to consumers.

Why did the stock market dive after the RBI stand?


Why did the stock market dive after the RBI stand?

According to experts, the market expected a cut in the key rate following the stress inflicted by the demonetization drive.

It was expected that rates will come down by at least 25 points given that the central bank had reduced rates by 150 basis points (One basis point equals 1/100th of 1%) in five instalments since 2015 to lower the cost of funds.

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What is meant by change in RBI's stand?

RBI monetary policy refers to how the central bank decides the size and rate of economic growth. This policy is maintained by modifying interest rate, buying or selling government bonds, changing bank reserve amounts etc.

An 'accommodative' stance means there is possibility for further cuts in interest rates, while neutral means that there will be no change in the current level of repo rate.

What does a 'neutral' stand mean for the people?


What does a 'neutral' stand mean for the people?

The RBI is expecting that the inflation would go up in coming quarters, largely because oil prices are on the rise globally.

A spurt in consumer spending (triggered by corporate activities backed by lower interest rates) would compound the inflationary situation further. People will have more disposable income.

To keep this inflation in check, the RBI has left the repo rate unchanged.

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