RBI’s changes in policy rates

Why in news?

The Reserve Bank of India (RBI) kept the key policy rate, or the repo rate, unchanged in the first bimonthly policy review of 2017-18 but narrowed the policy corridor by 25 bps by raising the reverse repo rate to 6%, from 5.75%.

What are the reasons?

• The central bank said the policy decision was consistent with the neutral policy stance with the objective of achieving the medium-term target for retail inflation, which is 4%.
• The RBI governor said that the MPC saw the path of inflation in 2017-18 challenged by upside risks and unfavourable base effects towards the second half of the year.
• Accordingly, inflation developments have to be closely monitored with food price pressures can be checked so that inflation expectations can be anchored.
• The central bank said the future course of monetary policy would largely depend on incoming data on how macroeconomic conditions are evolving.

Is Inflation a challenge?

• RBI said the path to achieving 4% inflation would be challenging.
• The central bank has set its inflation projection to an average of 4.5% in the first half of 2017-18 and 5% in the second half, while keeping its GVA growth projection unchanged at 7.4% for FY18 as compared with 6.7% in FY17.
• The central bank said while surplus liquidity in the banking system had fallen from close to Rs 8 lakh crore in January to Rs 4.8 lakh crore in March.
• The central bank said it had proposed a standing deposit facility to the government in November 2015, approval for which was still awaited.
• SDF is a mechanism to drain surplus cash at a rate lower than the repo rate without the need for any collateral.
• Analysts said there were upside risks to the 4% target and there was a possibility of an increase in the cash reserve ratio, going forward.

Source: The Hindu