RBI cut Repo Rate by 0.25% in first Bi-Monthly Monetary Policy Statement 2016-17

Apr 6, 2016 15:48 IST

The Reserve Bank of India (RBI) on 5 April 2016 released first Bi-Monthly Monetary Policy Statement 2016-17.

One of the key announcements under the policy was reduction in the repo rate at which RBI lends to the financial system.

Highlights of the Policy

• The policy repo rate under the liquidity adjustment facility (LAF) was reduced by 25 basis points from 6.75 per cent to 6.5 per cent, the lowest in 5 years.

• The minimum daily maintenance of the cash reserve ratio (CRR) from was reduced from 95 per cent of the requirement to 90 per cent with effect from the fortnight beginning 16 April 2016.

• The policy rate corridor will be narrowed from +/-100 basis points (bps) to +/- 50 bps. In effect, the reverse repo rate will be 50 basis points lower than repo rate and the MSF rate will be 50 basis points higher than repo rate.

• Earlier, the reverse repo rate used to be 100 basis points lower than the repo rate and marginal standing facility (MSF) rate was 100 basis points higher than the repo rate.

Based on the assessment of the current and evolving macroeconomic situation, the following changes were announced in key policy rates

Repo Rate: Reduced Repo rate under Liquidity Adjustment Facility (LAF) by 25 basis points from 6.75 percent to 6.50 percent

Reverse Repo Rate under the LAF: Stands adjusted to 6.0 percent

Cash Reserve Ratio (CRR): Kept unchanged at 4.0 percent of net demand and time liabilities (NDTL)

Marginal standing facility (MSF) Rate: 7.0 percent

Bank Rate: The Bank Rate which is aligned to the MSF rate also stands adjusted to 7.0 per cent.

Why the rate cut was necessitated?

• Inflation has evolved along the projected trajectory and the target set for January 2016 was met with a marginal undershoots.

• CPI inflation is expected to decelerate modestly and remain around 5 per cent during 2016-17 with small inter-quarter variations.

• The uneven recovery in growth in 2015-16 is likely to strengthen gradually into 2016-17.

• This projection is based on a normal monsoon, the likely boost to consumption demand from the implementation of the 7th Pay Commission recommendations and OROP and continuing monetary policy accommodation.

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