RBI keeps repo rate unchanged at 6.5%

The Reserve Bank of India (RBI) on Friday retained the existing repo rate at 6.5%, as it mooted over the trade-off between inflationary pressure and liquidity issues in the system.

The move comes after two consecutive rate hike by the apex bank, with earlier two emancipating solely out of inflationary concerns.

The apex bank, in two meetings of monetary policy committee (MPC) for 2018 – June and August, hiked the bank rate by 25 bps every time.

Consequently, the reverse repo rate under the LAF remains at 6.25%, and the marginal standing facility (MSF) rate and the Bank Rate at 6.75%.

"The decision of the MPC is consistent with the stance of calibrated tightening 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," RBI said in policy statement.

Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation.

Also, liquidity concerns might have prompted RBI to hold on to the rates. "Systemic liquidity alternated between surplus and deficit during August-September 2018, reflecting the combined impact of expansion of currency in circulation, Reserve Bank’s forex operations and movements in government cash balances. From a daily net average surplus of Rs 201 billion during August 1-19, 2018, liquidity moved into deficit during August 20-30," it said

The decision in favour of hiking the interest rates was voted 5:1 by the six-member MPC of the RBI. The hike is contradictary the markets expectations, as crude oil price have been rising and rupee has been weaking.

Morever, due to interest rate differential with the US debt market, the country has seen a huge outflow of FIIs and FPIs, who have withdrawn a record Rs 68,096 crore from the Indian debt and equity markets.

Most analysts as such had predicted a 25 bps rate hike by RBI. Earlier, on September 27, US Fed Reserve also hiked its Fed Fund Rates by 25 bps. In its last policy review meeting, on August 2, 2018, the Bank of England had also raised the bank rates in UK by 25 basis points.

Meanwhile, the bloodbath continued on Indian stock markets, as BSE Sensex tanked by 359.13 in the intra-day trade and NSE Nifty tanked by 155.55 points.