Monetary policy review: RBI keeps repo rate unchanged at 6.5%

RBI Monetary Policy Meet

The Reserve Bank of India (RBI) kept the key policy rates unchanged in its fifth bi-monthly policy announced on Wednesday.

"Based on an assessment of prevailing liquidity conditions and also of the durable liquidity needs going forward, the Reserve Bank has made a decision to conduct the purchase of ... government securities under open market operations for an aggregate amount of Rs 100 billion on December 6, 2018 (Thursday)", the central bank said.

Will RBI change its outlook on inflation? RBI said inflation in the second half of the current fiscal is projected at 2.7-3.2 percent. Oil prices have fallen almost 30 per cent after hitting a high of $86/barrel early October.

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. The first reduction of 25 basis points will take effect in the quarter commencing January 2019. Currently, SLR stands at 19.5 percent.

The repo rate is the rate at which the RBI lends short-term money to the banks. This step, however, may harden yields in the government securities market as the process would allow banks to reduce government security holding cumulatively to the tune of Rs 2 trillion. Calibrated Tightening means rate cut is off the table this cycle.

The central bank also retained the GDP growth projection for 2018-19 at 7.4 per cent.

Over the past five years, annual inflation saw its lowest level in April 2013, with 6.13 percent, and its highest level this October. FDI flows could also increase with the improving prospects of the external sector.

SLR is the reserve requirement that the commercial banks in India are required to maintain in the form of cash, gold reserves, government-approved securities before providing credit to the customers. This may inject almost ₹65,000 crore of liquidity into the system.

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