RBI keeps repo rate unchanged at 6.25 pct; to withdraw incremental CRR

The Reserve Bank of India (RBI) on Wednesday kept its key lending rate, the repo rate unchanged at 6.25 percent against a widely-anticipated cut of 25 basis points.

The six-member monetary policy committee (MPC) headed by the RBI Governor Urjit Patel also retained the MSF and bank rate at 6.75 percent.

Not much commentary has been made on the cash reserve ratio (CRR) the

proportion of deposits banks are required to park with the RBI, which is at four percent.

However, it has withdrawn the incremental CRR requirement December 10 onward. Outflook for FY17 GVA has been revised down from 7.6 percent to 7.1 percent with evenly balanced risks.

India's retail inflation touched 4.20 percent in October, triggering hopes of a rate cut. Following the government's demonetisation move, banks are awash with funds as millions of people are queuing up every day to deposit banned Rs. 500 and Rs. 1,000 notes ahead of the December 30 deadline.

A higher CRR is not favored by banks as it earns no return. However, government has assured that it will be lowered once fresh market stabilization scheme (MSS) bonds are issued.

Accordingly, the limit for MSS bonds had been raise to Rs. six lakh crore for the fiscal from Rs. 30,000 crore.

A lower repo rate would have meant major benefits for households like cheaper bank loans to buy houses and goods such as cars, most of which are bought through loans.

The RBI and the government have set a retail inflation target of 4 percent for the next five years with an upper tolerance level of six percent and lower limit of two percent.

According to the initial estimates suggest that "demonetisation" of Rs. 500 and Rs. 1,000 notes have dampened consumer durable sales, particularly in rural areas where most transactions take place in cash, partially offsetting the gains from abundant summer rains this year after two years of successive drought.

The slowdown in household spending could push back investment growth with firms already sitting on vast unused capacities in consumption-linked sectors.