RBI keeps policy rate unchanged

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The Monetary Policy Committee (MPC) of the Reserve Bank of India at its meeting today made a decision to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.25 per cent, RBI stated in a release. "The future course of monetary policy will largely depend on incoming data on how macroeconomic conditions are evolving", the central bank said.

India's consumer price inflation (CPI) had edged up to 3.65 percent in February from 3.17 percent as food prices had started to rise.

The RBI has said that for 2017-18, inflation is projected to average 4.5 per cent in the first-half and 5 per cent in the second-half.

"Given the inflation risks highlighted by the MPC, including the monsoon dynamics, increased allowances related to the pay commission, one-off impact of GST and global reflation risks, as well as the assessed trajectory of CPI inflation, the repo rate appears highly likely to be on hold during 2017", said rating agency Icra Group Chief Executive Naresh Takkar.

The Reserve Bank of India (RBI) today retained the repo rate at 6.25 per cent in the first policy decision of the new fiscal keeping in mind the potential for an inflation surge due to disrupting monsoon rainfall and a hike in global commodity prices. This move will help narrow the liquidity adjustment facility (LAF) corridor, which is used traditionally to help banks in adjusting daily mismatches in liquidity. India's growth was higher than China's 6.8 percent for the last three months of 2016. The market will await clarity on both the magnitude of open market operations, which are constrained by the size of RBI's holdings of government securities, as also operational details for the proposed non-collateralized standing deposit facility, which would greatly augment the central bank's liquidity management toolkit.

The Nifty ended 0.03 percent lower at 9,261.95, after having fallen as much as 0.50 percent before the central bank's policy announcement.

Patel had said he would wait for more clarity on the inflation trend and impact of demonetisation on growth before making change in the key policy rate. "Having unexpectedly shifted at the prior meeting to neutral from accommodative, it would maintain its concerns about inflation", foreign brokerage CLSA said in a recent note.

However, the RBI surprised bankers and analysts by narrowing the policy corridor to 50 bps from 100 bps in a move aimed at anchoring the weighted average call rate closer to the policy repo rate.

This is for the third time the RBI has not cut interest rate.

"The current policy stance and upcoming uncertainties may make it hard to determine future course of policy actions for markets, MPC's and the bond markets moves will therefore be more data dependent" he added.

MSS, OMO will further be used to manage liquidity as RBI is still in wait and watch mode post demonetization.

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