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RBI keeps key rates unchanged

Thursday, December 06, 2018

The Reserve Bank of India (RBI) yesterday expectedly kept interest rates unchanged but held out a promise to cut them if the upside risks to the inflation do not materialise.

It also coaxed banks to lend more in order to support the slowing economy.

With all the six member of the monetary policy committee (MPC) voting for a hold on rates, the RBI kept benchmark repurchase (repo) rate at 6.5%.

Having raised rates twice this year, the central bank retained its 'calibrated tightening' policy stance. "Even as inflation projections have been revised downwards significantly and some of the risks pointed out in the last resolution have been mitigated, especially of crude oil prices, several uncertainties still cloud the inflation outlook," it said in a statement.

While the statement was silent on future outlook on interest rates, RBI Governor Urjit Patel at the customary post MPC meeting press conference held out hope of a reduction if upside risks to inflation did not materialise.

"If the upside risks we have flagged do not materialise or are muted in their impact as reflected in incoming data, there is a possibility of space opening up for commensurate policy actions by the MPC," Patel said.

He said the MPC retained its stance at calibrated tightening "so as to buy time

to pause, reflect and undertake future policy action with more robust inflation signals".

Retains GDP projection for current fiscal at 7.4%
The Reserve Bank yesterday retained its GDP forecast for the current fiscal at 7.4% and said growth will accelerate further to 7.5% in first half of 2019-20, driven by acceleration in investment activity. The central bank said that the GDP growth in April-September of current fiscal has been broadly in line with RBI projection of 7.4% for full fiscal.

The RBI decision to keep rates on hold was more in consonance with market expectations but the policy guidance was a pleasant and pragmatic surprise. On the development front, permitting non-residents to hedge their rupee interest risk is a welcome move providing the much-needed fillip to the Rupee Interest Rate Derivative market. Allowing non-residents to participate in the OIS market for non-hedging purpose will also add depth to the market in terms of broad based participation. The LCR alignment to Basel III was already known but now the RBI has provided a clear and time bound glide path for transition to the new regime.
—Rajnish Kumar, Chairman, SBI

As a major step, RBI has also announced linking of all new floating rate personal / retail & MSMEs loans to one of the four suggested External Benchmarks from April 1, 2019. This will introduce greater standardization of these loan categories.Further, RBI has announced banks to stipulate a minimum level of 'loan component' in fund-based working capital finance for larger borrowers from April 1, 2019. This is expected to promote greater credit discipline among borrowers enjoying working capital limit. SLR requirements have been aligned further with the benchmark LCR requirements with proposal to reduce the SLR by 25 bps every calendar quarter (w.e.f. quarter commencing January 2019) until the SLR reaches 18% of NDT.
—Dinabandhu Mohapatra, MD & CEO, Bank of India

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