RBI keeps key rate unchanged; cuts SLR, lowers GDP projection

In a largely expected move, the Monetary Policy Committee (MPC) decided to keep rates unchanged. While the repo rate stands unchanged at 6.25%, the reverse repo has been maintained at 6%. The marginal standing facility and the bank rate also remain unchanged at 6.5%.

However, there is some good news for borrowers of home loans above Rs 75 lakh. The central bank has decided to reduce the risk weightage on loans above Rs 75 lakh to 50% from 75% earlier, a move that is likely to reduce rates for that particular segment of borrowers.

The central bank also decided to reduce Statutory Liquidity Ratio (SLR) of banks by 0.5% to 20% from 20.5% earlier, a move which is likely to bring in liquidity of close to Rs 50,000 crore back to the system. SLR is the Indian government term for reserve requirement that the commercial banks in India require to maintain in the form of gold, government approved securities before providing credit to the customers.

The MPC, which had a unanimous view till now after it was constituted, however, had some divergence when it comes to policy rates. While five members were in favour of the monetary policy decision, Ravindra H Dholakia was not in favour of maintaining status quo.

“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% within a band of +/- 2%, while supporting growth,” RBI said in the second bi-monthly monetary policy statement for 2017-18.

According to RBI, premature action at this stage risks disruptive policy reversals later due to which the MPC decided to maintain a status quo. “Noting that inflation has fallen below 4% only since November 2016, the MPC remains focused on its commitment to keeping headline inflation close to 4% on a durable basis keeping in mind the output gap. The current state of the economy underscores the need to revive private investment, restore banking sector health and remove infrastructural bottlenecks,” RBI said.

Monetary policy can play a more effective role only when these factors are in place. Premature action at this stage risks disruptive policy reversals later and the loss of credibility.

Accordingly, the MPC decided to keep the policy rate unchanged with a neutral stance and remain watchful of incoming data, RBI added.