Benchmark interest rate kept unchanged

Benchmark interest rate kept unchanged

The Reserve Bank of India (RBI) at its sixth bi-monthly monetary policy on Wednesday decided to keep repo rate and the reverse repo rate unchanged at 6.25% and 5.75%, respectively.

The monetary policy committee (MPC) also changed its stance to neutral from accomodative, clearly indicating that near term rate cuts by the RBI are unlikely. 

Reacting to it, State Bank of India Chairman Arundhati Bhattacharya said the RBI’s decision to maintain status quo was on expected lines. “RBI view is right that monetary policy transmission will improve further if non-performing assets (NPAs) are resolved, capital position of banks improves and small savings rates are more market driven,” she said.

 The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving consumer price index (CPI) inflation at 5% by Q4 of 2016-17 and the medium-term target of 4% within a band of plus or minus 2%, while supporting growth, the RBI said.

 “The committee remains committed to bringing headline inflation closer to 4% on a durable basis and in a calibrated manner. This requires further significant decline in inflation expectations, especially since the services component of inflation that is sensitive to wage movements has been sticky. The committee decided to change the stance from accommodative to neutral while keeping the policy rate on hold to assess how the transitory effects of demonetisation on inflation and the output gap play out,” it added.

 Many economists as well as market analysts had expected a 25 basis points rate cut by the RBI in the current policy.

 This was the third monetary policy by the six-member MPC.  The MPC also observed that factors including quicker resolution of NPAs and recapitalisation of banks could help faster transmission of rates.

 ICICI Bank MD and CEO Chanda Kochhar said the decision to keep the policy rate unchanged and the change in stance from accommodative to neutral is based on a judicious assessment of risks going forward.

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