Moneycontrol Bureau
The Reserve Bank of India (RBI) on Wednesday kept its key lending rate or the repo rate unchanged at 6.25 percent against a widely-anticipated cut of 25-50 basis points.
The monetary policy committee (MPC) headed by RBI Governor Urjit Patel and six other members, also retained the MSF and bank rate at 6.75 percent and reverse repo rate at 5.75 percent. While the Cash reserve ratio (CRR) or percentage of deposits required to be maintained with the RBI is retained at 4 percent, incremental CRR requirement on deposits made between September 16 to November 11 has been withdrawn effective December 10.
Surge of funds following the government’s demonetisation move had prompted the central bank to raise the CRR to drain out the liquidity. However, a higher CRR is not favoured by banks as these deposits earn no return. Government had assured that it will be lowered once fresh market stabilisation scheme (MSS) bonds are issued. Accordingly, the limit for MSS bonds had been raised to Rs 6 lakh crore for the fiscal from Rs 30,000 crore aiding in withdrawal of incremental CRR.So far banks have aggregated “demonetised” deposits worth close to Rs 11.5 lakh crore according to the Deputy Governor R Gandhi. The Reserve Bank has also revised downward the outlook on growth for FY17 as measured by gross value added (GVA) from 7.6 percent to 7.1 percent saying the outlook turned uncertain after the unexpected loss of momentum by 50 basis points in Q2 and the effects of the withdrawal of specified bank notes, which are still playing out.
Consumer Price Index (CPI) projections are maintained at 5 percent for Q4FY17 with risks tilted to the upside, lower than the October policy, RBI said in a release.
A drop in retail inflation to 4.20 percent in October had triggered hopes of a rate cut. The RBI and the government had set a retail inflation target of 4 percent for the next five years with an upper tolerance level of 6 percent and lower limit of 2 percent.
A lower repo rate would have meant major benefits for households with loans getting cheaper. However, a lot still depended on whether there was enough transmission of these rate cuts by banks to the end consumer. While the RBI has cut repo rate seven times since January 2015, real transmission of these cuts has been far lower.
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