RBI keeps key rates unchanged at 6.5%

MUMBAI: The Reserve Bank of India (RBI) has kept key rates unchanged with the repo rate at 6.50% and reverse repo rate at 6%.

The Marginal Standing Facility rate has been unchanged at 7%. The Cash Reserve Ratio of the scheduled banks was also left unchanged at 4% of net demand and time liabilities.

This was the last monetary policy review announced by the RBI Governor Raghuram Rajan who will be stepping down from the post on September 4th as his three-year term ends.

The RBI will “continue to provide liquidity as required but progressively lower the average ex ante liquidity deficit in the system from one per cent of NDTL to a position closer to neutrality,” Rajan said in the monetary policy release.

The Wholesale Price Index- and Consumer Price Index-led inflation has been above 5% in May and June.

“Retail inflation measured by the headline consumer price index (CPI) rose to a 22-month high in June, with a sharp pick-up in momentum overwhelming favourable base effects. The rise was mainly driven by food, with vegetable inflation higher than the usual seasonal rise at this time of the year.

“Sugar prices also firmed up due to a decline in domestic production after two successive years of drought. While pulses inflation started moderating, prices of pulses have been rising again since April after a short-lived correction in the previous quarter. Inflation pressures are also incipient in cereals. These developments fed through into households’ inflation expectations three months ahead, reversing the decline seen in the last two quarters,” Rajan said.

Going ahead, risks to the inflation target of 5% for March 2017 continue to be on the upside. while the direct statistical effect of house rent allowances under the 7th CPC’s award may be looked through, its impact on inflation expectations will have to be carefully monitored so as to pre-empt a generalisation of inflation pressures. In terms of immediate outcomes, much will depend on the benign effects of the monsoon on food prices.

Considering all these factors, it’s appropriate for the RBI to keep the policy repo rate unchanged at this juncture, while awaiting space for policy action. “The stance of monetary policy remains accommodative and will continue to emphasise the adequate provision of liquidity,” Rajan said.

The 30-share Sensex was trading at 28,111.78, down 70.79 or 0.25% from previous day’s close.