The Reserve Bank of India (RBI), has kept its benchmark lending parameter, the repo rate, unchanged at 6.25%. However, with this, the reverse repo rate has increased by 25 basis points to 6%.

The RBI’s decision is in line with predictions by most of the economists who expected a status quo from the central bank.

The banker’s bank, besides maintaining a status quo in the policy rate, has projected a gross domestic product (GDP), growth at 7.4%, for the current revenue, from 6.7% in 2016-17. All the six members of the monetary policy committee (MPC) voted in favor of the decision of no change in the repo rate.

The Repo rate, also referred to as the benchmark interest rate, is the rate at which the RBI gives money to the banks for a short-term. When the repo rate increases, borrowing from RBI, becomes more expensive. If RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate similarly. And if it wants to make it cheaper for banks to borrow money, it reduces the repo rate.

RBI has increased the reverse repo rate by 25 basis points to 6%. “The reverse repo rate under the Liquidity adjustment facility (LAF), is at 6%, and the marginal standing facility (MSF) rate and the Bank Rate are at 6.50%,” said the RBI.

The decision of the monetary policy committee, is stable, with a neutral stance of monetary policy, in accord with the objective of achieving consumer price index (CPI) inflation at 5%, by the fourth quarter of 2016-2017.”

Also, the Central bank, has set the medium-term target of 4% inflation within a band of plus or minus 2%, while supporting growth. It has also changed its policy stance from “accommodative” to “neutral”.

The bank also expects to see retail inflation at 5%, for March 2016 - April 2017 period. This is the RBI’s third policy decision, taken by rate-setting MPC, set on the lines of Federal Open Market Committee (FOMC) in the US, since its establishment in October 2016.

The Central bank, in its October policy meet, had cut repo rate by 25 basis points, to 6.25%, and since then it has not changed the short term lending rate. This policy stance was Urjit Patel's first rate measure as governor of the central bank. Recently, the central bank introduced, Viral Acharya as deputy governor in charge of monetary policy framework.

Earlier, when Raguram Rajan was the RBI Governor, the bank had cut repo rate by 175 basis points or 1.75%.

Urjit Patel, later in a press statement said, the government was considering the proposal to set up a Standing Deposit Facility (SDF), which would provide greater flexibility in managing excess liquidity.

Banks Face Cash Crunch, Repo Rate Unchanged at 6.25%

By Supraja