The Monetary Policy Committee, in its bi-monthly policy review, has taken a neutral stance and kept the repo rate and reverse repo rate unchanged at 6% and 5.75% respectively. The Cash Reserve Ratio (CRR) remains at 4%. Furthermore, inflation targets have been lowered from 5.1% to 4.5%, citing lower food prices. Furthermore, this has escalated a rally in stocks and bonds.
Following the announcement, RBI Governor Urjit Patel stated that a neutral stance has been maintained taking into account the uncertainties like revised MSP (Minimum Support Price) formula and fiscal slippages. Moreover, he also mentioned that normal monsoon and effective food supply management by the government could mitigate inflation risks coming from rising crude. Lastly, the RBI Governor also opined that Statistical impact of HRA (House Rent Allowance) increase for central government will continue till mid-2018 and gradually dissipate thereafter.”
For the fourth time in a row, RBI has maintained a status quo, owing to the easing inflation scenario in the country. Spurge in harvests has led to low vegetable prices. However, the effect of global crude prices remains uncertain. India imports 80% of its crude oil. Nevertheless, inflation risks can be mitigated by a normal monsoon and effective food supply management by the Government.
Repo rate is the rate at which the central bank of a country lends money to commercial banks in the event of any shortfall of funds. It is used by monetary authorities to control inflation.
Cash Reserve Ratio (CRR) is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank. CRR is set according to the guidelines of the central bank of a country.
Reverse Repo Rate: Reverse repo rate is the rate at which the central bank of a country borrows money from commercial banks within the country. It is a monetary policy instrument which can be used to control the money supply in the country.