The Reserve Bank of India on Thursday kept the repo rate – the rate at which the central bank lends to commercial banks – unchanged at 6.25%. However, it increased the reverse repo rate to 6% from 5.75%.
The repo rate helps control inflation. The decision was made at the bi-monthly meeting of the RBI’s Monetary Policy Committee.
“There was surge in liquidity in the system after demonetisation that the RBI had to absorb,” RBI Governor Urjit Patel said after the key rates were announced. “The bank focused on removing the liquidity overhang.”
Analysts had predicted that the MPC would keep the key rate unchanged. Economists had told mint that they expected the RBI to focus on taking out the extra liquidity from the system. Currently, banks have a lot of liquid money because of the volume of deposits made after the Centre demonetised Rs 500 and Rs 1,000 notes.
Moreover, Gross Value Added growth is projected to be 7.4% in 2017-’18, up from 6.7% the previous financial year, the RBI announced. GVA is the measure of the value of goods and services produced in a region. Patel added that the RBI’s forecast for inflation stood at 4.5% for the first half of the 2017-’18 financial year and at 5% for second half of the year.
The Marginal Standing Facility, which is a liquidity adjustment facility window the RBI had created in 2011, stands at 6.50%. MSF is the rate at which banks are allowed to borrow overnight funds from the RBI against approved government securities.