The 6-member Monetary Policy Committee (MPC), headed by Reserve Bank of India Governor Urjit Patel, in its fifth bi-monthly review, kept repo rate unchanged at 6 per cent and reverse repo at 5.75 per cent, in line with industry expectations.
Repo rate is the rate at which the central bank lends money to commercial banks, and a lower repo rate increases their lending capacity. Reverse repo rate is in turn the rate at which the commercial banks park their money with the central bank. The RBI had lowered repo rate from 6.25 per cent in August to boost lending.
It is said the reason for the decision was "achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of plus/minus 2 per cent, while supporting growth", and has forecast a higher inflation of 4.3-4.7 per cent for remainder of the current financial year.
The inflation rate currently stands at 3.58 per cent, the highest it has been in the last seven months, mainly driven by higher food and fuel prices. Food prices are however, slated to come down owing to relief from GST committee which has cut rates for several food items.
Although several factors are involved, controlled inflation, can stimulate economic growth as it boosts consumer spending. However, increase in lending resulting from lower repo rates by the RBI may lead to a dangerous trend of uncontrolled inflation - which is why the neutral stance was expected from the RBI.
The central bank, however, has kept the economic growth forecast unchanged at 6.7 per cent for the fiscal ending March 31. The individual growth projections for Q3 and Q4, FY18 are 7 per cent and 7.8 per cent respectively.