RBI keeps key rate unchanged

Monetary policy: RBI lowers inflation target for first half of FY19

After assessing the current and evolving macroeconomic situation in the economy, the six member Monetary Policy Committee (MPC) chose to keep the Repo Rate under the Liquidity Adjustment Facility (LAF) unchanged at 6.0 percent.

RBI will tomorrow make public the resolution of the MPC on its first bi-monthly monetary policy for the new fiscal, 2018-19, which commenced on April 1. In which five of six members voted for a hold, while one wanted a hike in the repo rate.

That said, an unchanged repo rate - the rate at which banks borrow from the RBI - dashed hopes of further lowering of borrowing costs for households and companies. The headline inflation after surging to a concerning 5.2 percent in December past year, cooled off to 5.07 percent in January and further to 4.4 percent in February.

According to the MPC statement, the recent volatility in global crude prices has brought considerable uncertainty to the near-term inflation outlook.

While inflation fears have eased in the short term, the RBI sounded cautious and opted to wait for more data instead of giving a clear indication of its policy path.

Nevertheless, the central bank is unlikely to change its stance on rates for some time as it continues to track incoming data.

On the flip side, MPC noted that external demand could be adversely impacted if crude oil prices persists at elevated levels or even increase and trade protectionism intensifies.

With regard to prices, the MPC lowered retail inflation target for the first half of current fiscal to 4.7-5.1 percent on sharp moderation in food price rise.

RBI Deputy Governor Viral Acharya went on to say that RBI is using multiple tools to absorb liquidity and system liquidity has been nearly neutral since December.

"In view of the associated risks, it has been decided that, with immediate effect, entities regulated by RBI shall not deal with or provide services to any individual or business entities dealing with or settling [virtual currencies]", the bank said in a statement. A lot depends on the lower repo as if there is a decrease recorded in the repo rate, then it helps in lowering the loan interest rates, which ultimately helps common people who have to pay back or are planning to take loans.

He added, "For the real estate sector, which has aligned to the government's ambitions, was looking for some encouragement that would move the needle towards accelerated growth". Now it is observed the MCLRs are higher by 10% - 12% in most leading retail lending banks.

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