The Reserve Bank maintained status quo third time in a row in its latest credit and monetary policy review.
The Reserve Bank of India on Wednesday kept the key rates unchanged, as widely expected. The Central Bank in its February policy meet said that it would kept Repo rate unchanged at six per cent, and reverse repo rate at 5.75 per cent.
The RBI maintained status quo third time in a row in its latest credit and monetary policy review.
RBI’s 6% repo rate is lowest in over seven years since November 2010.
In a 5-1 vote by the 6-member Monetary Policy Committee, the RBI decided to maintain status quo on repo rate, while keeping a ‘neutral’ stance.
A neutral stance of RBI provides it the flexibility to move in either of the directions. But, prevailing risk of inflation may mean that the RBI won't cut down the interest rates.
The decision of the MPC is consistent with the 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,” the central bank said in its sixth and last bi-monthly policy meeting of the current fiscal on Wednesday.
“The MPC decided to keep the policy repo rate on hold and continue with the neutral stance. The MPC reiterates its commitment to keep headline inflation close to 4 per cent on a durable basis,” the RBI added.
RBI’s decision is in line with analysts expectation. The Retail inflation has surged to a 17-month-high in the month of December at 5.61%, much higher than RBI’s target of 4%.
To control rising inflation and to keep a check on the growth are considered to be one of key functions of the RBI and to do that the Central Bank uses certain tools like Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), Repo Rate and Reverse Repo Rate.
What is CRR?
Cash reserve Ratio (CRR) is the amount that the banks have to keep with the RBI. If the central bank increases the CRR, the available amount with the banks gets lower.
The RBI uses the CRR to take out excessive money from the economic system. The current CRR rate is 4%. If RBI cuts CRR in its tomorrow's monetary policy then
that would led to gain in lending, investing power of the banks.
What is Statutory Liquidity Ratio (SLR)?
The key difference between the SLR and CRR is that under SLR banks earn returns on their cash that has been parked in RBI.
A lower SLR increases the banks' resources to lend and helps control inflation and pushes growth.
What is Repo Rate?
The rate at which the RBI lends money to commercial banks is called repo rate. Repo rate is a one of the key instrument of monetary policy. Whenever banks have any
shortage of funds they can always borrow from the RBI at the curent repo rate. A cut in the repo rate helps banks get money at a cheaper rate and vice versa.
Higher repo rate may slowdown the growth of the economy. If the repo rate is low then banks can charge lower interest rates on the loans taken by us.
At present, the repo rate is 6%.
What is Reverse Repo Rate?
To control the money supply in the country, RBI borrows money from commercial banks at a certain rate, that rate has been defined as Reverse Repo Rate.
When banks have surplus funds but have no lending (or) investment options, they deposit such funds with RBI. Banks earn interest on such funds.
Currently, the reverse repo rate is 5.75%.
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 "RBI retains 'neutral' monetary policy stance, keeps repo rate unchanged at 6%")
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