RBI keeps interest rates unchanged

Q.  What is the repo rate?
- Published on 05 Oct 17

a. Rate at which central bank lends short term money to banks
b. Rate at which central bank lends long term funds to banks
c. Rate at which central bank borrows short term money from banks
d. Rate at which central bank borrows long term funds from banks

ANSWER: Rate at which central bank lends short term money to banks
RBI keeps interest rates unchangedThe Reserve Bank of India (RBI) on Oct 4 kept the key interest rates unchanged, as was widely expected.

Repo rate - the rate at the which the central bank lends short-term money to banks- thus continues to stay at 6 per cent. The RBI had cut repo rate by 25 basis points (bps) in August.

RBI has also cut the economic growth forecast for the current fiscal to 6.7 per cent from earlier projections of 7.3 per cent.

The decision of the Monetary Policy Committee (MPC) is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.

SLR or statutory liquidity ratio was, however, cut by 50 basis points to 19.5 per cent with effect from October 14.

Banks are required to invest certain percentage of their deposits in specified financial securities like Central Government or State Government securities.

This percentage is known as SLR. However, with adequate liquidity in the system, the SLR cut is unlikely to have much impact on banks.

The announcement which came at the end of a two-day meeting of the MPC of the RBI, is in sync with what the experts had predicted.

Inflation, which in August reached a five-month high of 3.36 per cent, is being billed as the reason behind RBI's decision to maintain status quo.

The RBI decision of increasing inflation forecast from 4 per cent to a range of 4.2 to 4.6 per cent for the October to March half backs this proposition.

Analysts expect inflation could continue to quicken, given food prices tend to rise during the winter.

Reverse repo rate - the rate at which the central bank borrows money from commercial banks- was also left unchanged at 5.75 per cent.

Industry body CII (Confederation of Indian Industry) had pitched for a rate cut of 100 bps while Assocham too had written to the MPC.

The slowing down of private investments being one of the major reasons behind the slump in growth, industry was hopeful of a rate cut, in order to provide a booster shot to the economy.

The central bank said it is imperative to reinvigorate investment activity which, in turn, would revive the demand for bank credit by industry as existing capacities get utilised and the requirements of new capacity open up to be financed.

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