The Reserve Bank of India kept its repo rate unchanged at 6.25 percent for a third consecutive policy meeting on Thursday as it continues to guard against any potential flare-up in inflation and an uncertain global economic environment.
The RBI also announced a 25 basis point rise in the reverse repo rate to 6.00 percent, narrowing the gap between the repo and the reverse repo.
"The future course of monetary policy will largely depend on incoming data on how macroeconomic conditions are evolving".
After a two-day meeting of the Monetary Policy Committee, Reserve Bank of India governor, Urjit Patel projected inflation to be 4.5% for the first half of 2017-18 and 5% for the second half of the year.
The monetary authority said it is anxious on three fronts on the inflation and the general economy: A possible el nino impact on the monsoon, the GST implementation, and seventh pay commission award.
Welcoming the status quo policy India Inc said the RBI has rightly not really gone over-board and resorted to much feared measures like hike in Cash Reserve while leaving the policy interest rates unchanged is on the expected lines.
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RBI reiterated its stance of bringing systemic liquidity closer to neutrality, and indicated that it would use a mix of tools towards this end, including longer-term variable reverse repo auctions, operations under the Market Stabilisation Scheme, issuance of cash management bills and open market operations.
The small savings rates, which are generally linked to the G-sec yields, were reduced by only 0.20 per cent during the one year to April 2017. It is also awaiting a decision from the government on the Standing Deposit Facility (SDF), an uncollateralised liquidity absorption facility, its preferred measure to absorb surplus liquidity. For 2017-18, inflation is projected to average 4.5 percent in the first half of 2017 and five percent in the second half of the year. However, it increased the reverse repo rate to 6% from 5.75%.
It has been noted that banks have not been able to transmit the effect of RBI rate cut wholly partly due to their rising NPAs since the move will hit their margins which are already under pressure due to bad loans. "Since their shift to a neutral stance from accommodative back in February, we take stock of the risks that were highlighted.The modest uptick in inflation and better growth prospects will reinforce their decision to maintain a neutral stance", she wrote in her note three days ago.
But this does not necessarily mean that as inflationary pressures risk, the RBI will act with rate action.
"The current policy stance and upcoming uncertainties may make it hard to determine future course of policy actions for markets, MPC's and the bond markets moves will therefore be more data dependent" he added. "Our estimates now indicate there would be a permanent liquidity injection of least Rs 1.7 lakh crore or 1.1 per cent of GDP", Ghosh said.