RBI surprises: Reverse Repo Rate hiked, Repo Rate Status Quo

The Reserve bank of India much awaited policy announcement has got Repo rate Status Quo. Repo rate is the rate at which commercial banks borrow money from RBI. The Central bank of India kept it’s repo rate unchanged at 6.25% for the their consecutive time. The bank continues to believe that there could be potential rise in inflation due to rate cut. Also, the RBI is contemplating global economic activity which could question RBI’s rate cut in question.

An RBI’s 6 member Monetary policy committee (MPC) was set up to opine their views on how and should RBI introduce a rate cut of .25%. So, in totality, the repo rate remain unchanged at 6.25%, and the reverse repo rate has increased from 5. 75% to 6%, as announced by RBI Governor Urjit Patel.

Amidst these changes, the liquidity in the system also increased. The overnight call money rates fell down to 5.75%, as a result of high liquidity. As a matter of fact, the call money rate cannot fall below the reverse repo rate or rise higher than the repo rate. This is essentially because RBI provides these facilities at these rates.

Nonetheless, the reverse repo-rate (rate at which RBI borrows money from commercial banks) has been increased to 6%. This means that all commercial banks like HDFC, ICICI, SBI would now earn a greater interest on providing loans to RBI.

Also, the Central Bank highlighted growing inflation. Although a 4.5% inflation rate is expected in the first half of the current fiscal year (i.e. April 2017-September 31). the Central Bank hinted a 5% inflation rate in the second half (October 1-March 31) . This, it said is a result of unfavourable base effect and other risks.

Post the policy announcement, the overnight call rates also pegged at .2% (20 basis points). In addition to this, the rupee is soaring as a stronger currency by the day. It hovered around 64.53 on it’s last close, which saw a mild upswing till 64.88 after the policy announcement.