Economy

RBI keeps interest rates unchanged

RBI keeps interest rates unchanged

Five out of the six-member Monetary Policy Committee (MPC) voted in favour of keeping the repo rate unchanged at 6.50 percent and the reverse repo rate at 6.25 percent. While this reduction is unlikely to have a material impact on domestic liquidity, it is part of the road-map to align SLR with 100% liquidity coverage ratio (LCR). However, the central bank's decision to ask banks to price all floating rate loans to an external benchmark from 1 April could ensure better policy transmission. The central bank said that several uncertainties, including the risk of sudden reversal in food prices, uncertain outlook on crude oil prices and possible fiscal slippage, were clouding the inflation outlook. Oil prices have fallen almost 30 per cent after hitting a high of $86/barrel early October.

Example - An Individual deposits say Rs 1000 in bank.

The repo rate is the rate at which the RBI lends short-term money to the banks. If the prevailing SLR is 20% then they will have to invest Rs 200 in Government Securities. Barring large unexpected developments, we expect the RBI to remain in the pause mode for the reminder of FY19.

RBI Governor Urjit Patel-led monetary policy committee (MPC) on Wednesday kept key rates unchanged for the second consecutive time this year.

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The bond markets, which interpreted this as a possibility of a future rate cut, saw the 10-year bond yield fall over 13 bps during trade.

Apart from the interest rates, investors are also keen to watch Patel's response to the issues related to RBI's autonomy and reserves. The RBI has also maintained the GDP for 2018-19 at 7.4 per cent. The RBI had, however, changed its stance from "neutral" to "calibrated tightening", revising its retail inflation projection on the upside.

While the Statutory Liquidity Ratio now remains unchanged at 19.5%, the RBI has said it will be gradually reduced to 18% over the next six quarters. Hence, to address the issue, the committee has made a decision to set up an Expert Committee to identify causes and propose long-term solutions for the economic and financial sustainability of the MSME sector.