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08 Jun 2017

RBI Monetary Policy Committee keeps repo rate unchanged at 6.25%

Governor Urjit Patel-led six-member Monetary Policy Committee (MPC) of the Reserve Bank of India kept the repo rate (short-term lending rate) unchanged, while slashed the statutory liquidity ratio (SLR) by 50 basis points to 20% in their second bimonthly monetary policy review.

Separately, it has also slashed standard asset provisioning requirement for home loans from 0.4% to 0.25%.

Here's all you need to know.

In context

RBI says, its decision reflects neutral monetary policy
Reason for not going into a rate cut


Reason for not going into a rate cut

FinMin Jaitley had earlier said "...growth and investment need to improve. These are indicators which are available. Any finance minister under these circumstances would like a rate cut, the private sector would like a rate cut."

However, RBI believes, a rate cut is currently not viable, as proper transmission of policy rates wouldn't be possible with banking system balking under NPAs and bad loans.


RBI's "neutral" monetary policy

The central bank statement said that five MPC members were in favor of the decision, except Dr. Ravindra H. Dholakia.

RBI said, "The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index [CPI] inflation of 4% within a band of +/- 2% while supporting growth."

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Remedying recent slowdown


Remedying recent slowdown

The RBI is now rehashing the debt structuring mechanism to address the mammoth bad loan burden, mainly on the resolution of large assets, Deputy Governor N. S. Vishwanathan said.

Along with that, RBI Deputy Governor, Viral Acharya said that RBI will carry out, "targeted intervention to create greater lending capacity for the healthier sectors of the economy that have recently slowed down."


RBI is over- cautious, says ASSOCHAM

Associated Chambers of Commerce and Industry of India (ASSOCHAM) said RBI has "disappointed India Inc" by not altering policy interest rates.

"It is clear that the RBI has chosen to remain over-cautious about the inflation outlook even when the key data like crude oil, monsoon, and an inability of the producers to hike prices made a clear-cut case for softening of the interest rates."

Demonetization didn't curb growth


Demonetization didn't curb growth

RBI said that demonetization didn't stall economic growth; Governor Urjit Patel said, "Data shows that the slowdown in the economic activity set in during Q1, FY17, well ahead of demonetization."

However, slashing standard asset provisioning requirement for housing loans to 25 basis points is expected to facilitate the flow of credit and help in reviving a sector that was worst hit during demonetization.


It's a wait-and-watch scenario

RBI now has a "neutral" monetary policy from the "accommodative" stance that it held earlier.

However, current tone suggests that there are chances of a future rate cut, which RBI deputy governor Viral Acharya also echoed by saying, "We will watch carefully in next few months the incoming data on inflation as well as the indicators of real economic activity."

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