Reserve Bank of India (RBI) Monetary Policy Review

RBI holds interest rates steady, shifts its stance to hawkish.


Published bi-monthly by the Reserve Bank of India (RBI). Updated to the month of September 2018. (Published on October 5, 2018).

Recent Data Trend

The Reserve Bank of India (RBI) kept its policy rates unchanged at 6.5% in its 4th-bi monthly policy meet. Consequently, reverse repo rate was unchanged at 6.25% while the marginal standing facility (MSF) rate and the bank rate were unaltered and fixed at 6.75%. 

The decision to keep the rates unchanged comes after five members of the Monetary Policy Committee (MPC) voted in favor of no change in the monetary policy decision and one member voting against it. There had been two consecutive rate hikes in the past meetings.

The MPC moved from a neutral stance to calibrated tightening of monetary policy. Given the price pressures in the economy continues to exist along with upside risks of inflation, more rate hikes are likely in the near future. The decision was in contrast to expectations of a rate hike (35 out of 64 analysts expected a rate hike in a Reuters poll), in order to keep track of rising inflation given the rupee fall and high fuel prices.

Despite the weak performance of the rupee (a decline of 14% since Jan'18), RBI's monetary policy committee decided to keep the rates unchanged, after which rupee touched a record low of 74 against the dollar and BSE Sensex fell down by 792.17 points down from 35169.16 at the end of the day.

Since the last MPC meeting, global trade has weakened because of the ongoing tariff wars. In the emerging markets, currency depreciation and elevated crude prices have kept the inflationary pressures up. In the case of the Indian economy, the price pressures were moderate but, the upside risks to inflation continue to persist.

The high-frequency indicators in July and August pointed to a mixed picture in the services sector. However, the strong growth in infrastructure and manufacturing output in June-July indicate an underlying momentum in economic growth.

On the inflation front, the consumer price index (CPI) fell from 4.9% in Jun'18 to 3.7% in August driven by a decline in food inflation.

Further, the MPC acknowledged the fall in core inflation (inflation. excl. food and fuel) after it reached 6% YoY in Aug'18. This indicates MPC's decision is in accord with the objective of achieving the medium-term target for CPI inflation of 4%. within a band of +/- 2% while supporting growth. The committee projected inflation to be around 4% in Q2:2018-19.

For the GDP print, the tightened presence of both global and domestic financial conditions could lower investment activities. But, MPC retained the GDP growth projection for Q2:2018-19 at 7.4%.

The decision of the RBI to keep the repo rate unchanged comes even after the continuous fall in rupee. To add to this there has been the rising crude prices and the pressure on external balances (India's BoP further slipped to USD 15.8 billion). Clearly, more importance was given on the financial stability (ensuring enough liquidity for banks) aspect and to remain within inflationary targets. However, the change in the stance indicates the possibility of rate hikes within the end of the year.

Brief Overview
RBI's monetary policy has emerged as a critical policy tool for achieving overall macroeconomic management, price stability, and growth. The conduct of monetary policy has evolved over time on the front of the policy framework and operating procedure. Back in the 1980s, when the economy was plagued by high inflation fuelled by excessive money supply in the form of RBI credit to government, price stability became utmost important. So, RBI adopted "monetary targeting with feedback" (targeting money supply) as the monetary policy framework suggested by the Chakravarty Committee (1985).

With the development of the financial sector, liberalization of the economy (1991) and freeing up of interest rates and exchange rates, RBI shifted its focus from exclusive reliance on monetary aggregates to a broad set of indicators. Therefore, in 1998-99 RBI started pursuing the multiple indicators approach only to later face problems associated with fulfilling multiple objectives.

However, on the recommendations of the Urjit Patel Committee (2014), RBI shifted to a new monetary policy framework of "inflation targeting". Since 2014-15, RBI has kept its mandate of achieving price stability and growth via inflation targeting.

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Next Release Date: December 5th, 2018