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RBI keeps repo rate unchanged at 6.50%; lowers inflation forecast for H2FY19

The Reserve Bank of India (RBI), in its fifth bi-monthly monetary policy review of 2018-19, has kept repo rate under the liquidity adjustment facility (LAF) unchanged at 6.50%, in line with expectations, taking into account easing global crude prices, benign inflation and moderation in economic growth. This is for the second time in a row that the central bank maintained status quo. Consequently, the reverse repo rate under the LAF stood at 6.25%, and the marginal standing facility (MSF) rate and the Bank Rate at 6.75%. The RBI also maintained 'calibrated tightening' stance. The decision of the MPC is consistent the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth.

However, the RBI has decided to reduce statutory liquidity ratio (SLR), the portion of funds which banks are required to park in treasury bills and other instruments, by 0.25% every quarter beginning January. The calibrated reduction in SLR will continue till it reaches 18% of the net demand and time liabilities (NDTL) as part of aligning it with the liquidity coverage ratio (LCR). The current SLR is 19.5%.The first reduction of 25 basis points (bps) will take effect in the quarter commencing January 2019.

On the inflation front, the Central Bank has lowered retail inflation projection in the range of 2.7-3.2% for the second half of the current fiscal (H2FY19) and 3.8-4.2% in H1 FY20, with risks tilted to the upside, citing normal monsoon and moderate food prices. It added that the broad-based weakening of food prices imparts downward bias to the headline inflation trajectory going forward. Earlier, it had projected the retail inflation to be around 3.9-4.5% in the October-March period of 2018-19. It said the projected inflation path remains unchanged after adjusting for the HRA impact of central government employees as this impact dissipates completely from December 2018 onwards.

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