In its fourth bi-monthly review of India’s monetary and credit policy, the Reserve Bank of India (RBI) has decided to keep the repo rate (the rate at which RBI lends money to other banks) unchanged at 6%. This decision by RBI policy review comes amidst a time when the country’s economic growth has slipped to a three-year low of 5.7% for the quarter ended June 2017.
The government favoured a rate cut by the RBI as it is something required to boost economic growth in the current scenario. Since the manufacturing sector has been adversely impacted by GST and demonetisation, the industry is also demanding lower interest rates to spur growth. Despite these expectations, many experts have already predicted that there will not be any rate cut this time in order to keep the inflation under check.
The RBI is currently hoping to keep the inflation close to the 4% range. Without a cut in lending rates, the economic growth will be mild for the second half of the fiscal year. DBS Research has earlier cautioned that an economic stimulus at this point of time might widen the fiscal deficit and minimize the chances for future rate cuts. Hence, it seems likely that the RBI has taken a cautious approach with regard to the dilemma of economic growth vs. inflation.
The current RBI policy review committee headed by RBI Governor Urjit Patel was formed in October 2016. Since then, this committee has lowered repo rates twice. The most recent rate cut came in August 2017 when the lending rate was lowered by 25 basis points.
Apart from the unchanged lending rates, the RBI policy review statement of 2017-18 also has a few other highlights:
- Reverse repo rate remains unchanged at 5.75%.
- Statutory liquidity ratio has been lowered by 50 basis points to 19.5%.
- RBI has also lowered the country’s economic growth forecast to 6.7% from its earlier forecast of 7.3% for the fiscal year 2018.
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