The Reserve Bank of India has left the key interest rate or the repo rate unchanged at 6.5 per cent in the second bi-monthly review of its monetary policy.
RBI indicated that the risks to inflation were on the upside.
The central bank had lowered rate by 25 bps to 6.5 per cent in the last policy review in April.
RBI has reduced the repo rate by 150 bps since January 2015.
Five takeaways from RBI's money policy statement:
1. Inflation remains a concern: In April, the retail inflation measured by the consumer price index (CPI) rose sharply due to more than seasonal jump in food prices.
2. RBI maintains accommodative stance: In its bimonthly money policy statement of April 2016, RBI stated that it would watch macroeconomic and financial developments in the months ahead with a view to responding as and when the space opens up, but it maintained an accommodative stance.
3. Outlook on growth: Domestic conditions for growth are improving gradually, mainly driven by consumption demand, which is expected to strengthen with a normal monsoon and the implementation of the Seventh Pay Commission award.
4. More monetary transmission needed: RBI pushed for more monetary transmission from banks to support the revival of growth which continues to be critical.
5. Global growth remains a concern: Since the first bimonthly statement of the financial year in April 2016, global growth is uneven and struggling to gain traction.
Monetary policy is the macroeconomic policy laid down by the central bank. It involves management of money supply and interest rate and is the demand side economic policy used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth and liquidity.
In India, monetary policy of the Reserve Bank of India is aimed at managing the quantity of money in order to meet the requirements of different sectors of the economy and to increase the pace of economic growth.
The RBI implements the monetary policy through open market operations, bank rate policy, reserve system, credit control policy, moral persuasion and through many other instruments. Using any of these instruments will lead to changes in the interest rate, or the money supply in the economy. Monetary policy can be expansionary (increasing money supply) and contractionary (decreasing money supply) in nature.
While exercising monetary policy to manage money supply Indian economy RBI considers two conflicting objectives:-
1. Inflation which is undesirable
2. Economic growth which is desirable