RBI keeps repo rate unchanged at 6.5%, lowers inflation forecast sharply

Mae Love
December 6, 2018

The central bank said, come April 1, all new floating rate personal or retail loans (housing, auto, etc.) and floating rate loans to Micro and Small Enterprises extended by banks will be linked to one of the four benchmarks - policy repo rate, the 91-day Treasury Bill yield, the 182-day Treasury Bill yield, any other benchmark interest rate of Financial Benchmarks India. Dholakia, known for his dovish stance, voted to change the stance to neutral. For the first half of 2019-20, the GDP is been projected at 7.5 per cent. RBI said inflation in the second half of the current fiscal is projected at is projected at 2.7-3.2 per cent.

The RBI also slashed its inflation projection to 2.7-3.2 per cent by March-end from its prior view of 3.9-4.5 per cent.

While the comfort on inflation has increased, the comfort on growth has decreased. "If upside risks do not materialize or are muted in their impact as reflected in incoming data, there is a possibility of space opening up for commensurate policy actions by the MPC", RBI governor Urijit Patel said. Calibrated Tightening means rate cut is off the table this cycle. The next meeting of the MPC is scheduled from February 5-7, 2019.

SLR lowered to align with Liquidity Coverage Ratio: In order to align the SLR with the LCR requirement, the MPC made a decision to reduce the SLR by 25 basis points every calendar quarter until the SLR reaches 18 per cent of Net Demand and Time Liabilities (NDTL). However, it announced statutory liquidity ratio (SLR) will go down by 25 bps every quarter from January. LCR is the amount of high-quality liquid assets that banks have to set aside to meet short-term obligations.

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This is for the second time in a row that the central bank did not tinker with the interest rate.

Besides CRR, Banks have to invest certain percentage of their deposits in specified financial securities like Central Government or State Government securities.

"The RBI will definitely keep rates on hold for another two to three quarters, with the expectation that inflation will remain below 4 per cent over the next three to four quarters", said Shashank Mendiratta, India economist with ANZ Bank. The marginal standing facility (MSF) rate and the Bank Rate stand at 6.75 per cent.

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