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Monetary policy review: Policy rates unchanged
Why is it in the news ?
- The Reserve Bank of India (RBI) on 05 December(Wednesday) kept key policy rates unchanged at 6.5% as inflation eased significantly.
- It maintained the ‘calibrated tightening’ stance though it reduced the inflation projection sharply.
More in the news
- The central bank, while unveiling the bi-monthly monetary policy, cut its inflation projection to 2.7-3.2% by March 2018 from its earlier view of 3.9-4.5%.
- The sharp fall in inflation comes on the back of 30% decline in crude oil prices in November compared with October.
- However, RBI also forecast inflation picking up again to 3.8-4.2% in the first half of fiscal 2019-20, with risks tilted to the upside.
- RBI also slashed the statutory liquidity ratio-mandatory investment in government bonds-to 18% of total deposits over the next six quarters.
- Also, RBI retained the GDP growth to 7.4% for the year 2018-19 even as the government last week announced that the growth slowed down to 7.1%.
Concepts
- Repo rate is the rate at which the central bank (RBI) lends money to commercial banks in the event of any shortfall of funds.
- Repo rate is used by monetary authorities to control inflation.
- In the event of inflation, central banks increase repo rate as this acts as a disincentive for banks to borrow from the central bank.
- The central bank takes the contrary position in the event of a fall in inflationary pressures.
- Repo and reverse repo rates form a part of the liquidity adjustment facility.
Statutory Liquidity Ratio :
- It is a monetary policy instrument of the RBI.
- Under SLR, commercial banks have to keep a certain proportion of the demand and time deposits as liquid assets in their own vault.
- Liquid asset means assets in the form of cash, gold and approved securities (government securities).
- It stands 18% now, from 19.5% earlier.
Source
Indian Express.