The Reserve Bank of India Thursday kept its key policy rate or the repo rate unchanged at 6.25 percent. However, it raised the reverse rate to 6 percent from 5.75 percent due to narrowing of the liquidity adjustment facility corridor.
Subsequently, the bank rate and marginal standing facility now stand at 6.5 percent, down from 6.75 percent.
All six members of the monetary policy committee (MPC), headed by Governor Urjit Patel, voted in favour of the decision.
"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 percent within a band of +/- 2 percent, while supporting growth," Governor Urjit Patel said while announcing the policy.
In a release, the RBI said the Standing Deposit Facility (SDF) is being examined by the government. Many experts had been pointing out the RBI could introduce SDF through which banks could deposit cash without the RBI having to provide G-Secs as collateral to help the central bank suck out excess liquidity. However, this will require a legislative change because under current rules RBI cannot accept uncollateralised money.
With progressive remonetisation, the release said, the surplus liquidity in the banking system has come down to Rs 4,806 billion in March from a peak of Rs 7,956 billion on January 4.
In the last policy, the MPC had changed its stance to 'neutral' from 'accommodative' lowering chance of rate cut in the near future given growing inflation risks and global rate hiking cycles. Patel said the MPC will persevere with the stance.
The decision to keep rates constant means that households may have to wait longer for cheaper bank loans to buy houses and goods such as cars. Even as Patel acknowledged banks have reduced lending rates, he said there is further scope for a more 'complete transmission' of policy impulses, including for small savings/administered rates.
As opposed to 175 basis point (1.75 percentage point) rate cut in the repo rate over the past two years, the average bank lending rates have come down by 85-95 basis points (0.85 to 0.95 percentage points).
Ahead of the monetary policy decision, three banks including State Bank of India (SBI), HDFC Bank and Indian Overseas Bank reduced their base rate between 15-25 basis points earlier this week.
SBI has brought down its base rate by 15 basis points (bps) to 9.10 percent effective April 1. HDFC Bank has reduced its base rate by 25 bps to 9 percent, while IOB cut rates by 20 bps to 9.50 percent.
The RBI and the government have 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.
Along with rebalancing liquidity conditions, the RBI will also endeavour to put the resolution of banks’ stressed assets on a firm footing and create congenial conditions for bank credit to revive and flow to productive sectors of the economy, the release said.
On the loan waivers given to certain sections, Patel said, it undermines honest credit culture, impacts credit discipline and plugs incentives for future borrowers.
The next meeting of the MPC is scheduled on June 5 and 6.
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