6 reasons why the RBI kept repo rate unchanged for the third time in a row

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India’s central bank, the Reserve Bank of India (RBI), continued with its neutral stance and kept the repo rate at 6.25%. The six-member Monetary Policy Committee (MPC) hiked the reverse repo rate to 6% and kept the Cash Reserve Ratio (CRR) unchanged at 4%.

RBI Governor Urjit Patel narrowed the monetary policy corridor. RBI said it will manage the liquidity through Market Stabilization Scheme (MSS) and Open Market Operations (OMO).

It forecasted GVA growth to accelerate to 7.4% in FY18 and saw CPI inflation undershooting 5% target for Q4 FY17.

The RBI saw inflation at average 4.5% in H1 FY18 and 5% in H2. Meanwhile, the RBI is also planning to allow banks to invest in REITs and InvITs.

This is for the third time the RBI has not cut interest rate. Here are the reasons why

1. Inflation: The RBI is worried about the inflation. It stated since last bi-monthly monetary policy, inflation has been quiescent. Headline CPI inflation is set to undershoot the target of 5% for Q4 of 2016-17. For 2017-18, inflation is projected to average 4.5% in the first half of the year and 5% in the second half.

2. Remonetisation: The RBI stated the pace of remonetisation will continue to trigger a rebound in discretionary consumer spending. Significant improvement in transmission of past policy rate reductions into banks’ lending rates post demonetisation should help encourage both consumption and investment demand of healthy corporations.

3. Liquidity: Patel said with progressive remonetisation, the surplus liquidity in the banking system declined from a peak of Rs 7,956 billion on January 4, 2017 to an average of Rs 6,014 billion in February and further down to Rs 4,806 billion in March.

4. 7th Pay Commission: “A prominent risk could emanate from managing the implementation of the allowances recommended by the 7th Central Pay Commission. In case the increase in house rent allowance as recommended by the 7th CPC is awarded, it will push up the baseline trajectory by an estimated 100-150 basis points over a period of 12- 18 months, with this initial statistical impact on the CPI followed up by second order effects,” the RBI stated.

5. GST: The GST rollout will boost investor confidence and bring in efficiency gains.

6. Global financial markets: Turbulence in global financial markets set off a bout of global risk aversion and flight to safe haven that caused net outflows of foreign portfolio investment (FPI) during November 2016 to January 2017. The level of foreign exchange reserves was US$ 369.9 billion on March 31, 2017.
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