RBI maintained Repo rate unchanged at 6.5 % and warns for inflation risk

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Reserve Bank Governor Mr. Raghuram Rajan Finally announced third bi-monthly monetary policy of this financial year today, with no change in Repo rate 6.50%, there will be no change in the interest rates as well.  RBI Governor; Raghuram Rajan, whose term is going to end on Sept 4.The consumer Price Inflation is at near about 6% and upside risk on food inflation is still present for rest of the year, because food prices rarely react to monetary policy.  RBI warns there is an upside risk of increase in inflation.

However, if there will be a good monsoon food price may curb down and ease the inflation.

By unchanging repo rate, RBI retain the GDP growth projection at 7.6 % for 2016-17

RBI maintained CRR unchanged at 4%, Reverse Repo Rate at 6%. RBI also announced open market purchase auction to increase the liquidity in the market. Under the open market operation Central bank will infuse the amount of Rs. 805 billion and so far in the economy. This will help in easing the liquidity crunch in the economy and bring it to the neutral level.

Sensex up by 100 point straight away. Rupee soften six paise against dollar.

Open market operation- RBI sell or purchase Government securities in open market with an objective to increase or decrease the liquidity in the economy. When RBI sells G-Sec, banks purchase them. Selling securities reduce the surplus cash from the market. And when there is cash crunch RBI buys the security and infuse liquidity in the system. Open Market Operation (OMO) is a method to main the liquidity at a significant level in the system.

The central Government focused to maintain the retail inflation at the level of 5% by March 2017. The RBI and Government last year had an agreement on a monetary policy framework to set the inflation target at 4%, plus or minus 2% up to next five years.

There is one more surprise in the market is that, despite no rate cut bond yields have fallen down, bond yields and price moved in opposite direction. Negative bond yield is not good for economy.

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