RBI maintains key lending rate, narrows policy corridor

The Reserve Bank also narrowed policy rate corridor, due to liquidity flush, by increasing marginal standing facility rate and bank rate to 6.50 per cent.

On the downside, RBI said worldwide crude prices have been easing recently and their pass-through to domestic prices of petroleum products should alleviate pressure on headline inflation.

A majority of the economists surveyed by a economic journal expected the RBI to hold the repo rate at 6.25% and continue with its neutral stance. The hike does not increase interest rates but will help the RBI manage liquidity better by encouraging banks to park surplus funds with the central bank.

"It is important to note three significant upside risks that impart some uncertainty to the baseline inflation path - the hardening profile of worldwide crude prices; volatility in the exchange rate on account of global financial market developments, which could impart upside pressures to domestic inflation; and the fuller effects of the house rent allowances under the 7th Central Pay Commission", the RBI stated. It has also changed its policy stance from "accommodative" to "neutral".

Analysts at Bank of America Merill Lynch said while the RBI will pause at the June review, it will deliver a 0.25 per cent cut in the key lending rate in the August policy statement.

"Even as faced with a big challenge of ma " aging excess liquidity following demonetization, the RBI has rightly not really gone overboard and resorted to much feared measures like hike in Cash Reserve while leaving the policy interest rates unchanged is on the expected lines", industry body Assocham said in a statement.

"Several indicators are pointing to a modest improvement in the macroeconomic outlook. Going by the roadmap on liquidity management given by the RBI, I believe that more durable steps for liquidity management could be in the offing later on and may be before the next policy meeting".

Mumbai: The Reserve Bank on Thursday kept benchmark lending rate unchanged for the third consecutive policy review but raised the reverse repo rate as it stepped up efforts to check any spike in inflation if monsoon is below normal this year. There are no direct benefits attached for the financial institutions but indirectly they gain a lot with the increase in Reverse Repo and reduction in the MSF, allowing them to lend to RBI at higher rates and enabling overnight borrowing at a lower rate. As a result, the RBI said that inflation would average 4.5% in the first half of FY18 and rise to 5% in the second half.

The government, mindful of the impact on inflation, has already indicated it is considering acting with the RBI in implementing a special facility to drain the extra liquidity.

According to the head of another private sector lender, the central bank may not change rates on April 6.

The MPC noted that the Central Statistics Office's (CSO) second advance estimates for 2016-17, released on 28 February has placed India's real GVA growth at 6.7 per cent for the year, down from 7 per cent in the first advance estimates released on 6 January.

The RBI continues to be anxious about the quality of bank assets.

  • Wendy Palmer