Reserve Bank of India (RBI) Monetary Policy Review

In its third Bi-monthly policy meet, MPC went in for 35 bps rate cut to support growth.

Published bi-monthly by the Reserve Bank of India (RBI). Updated to the month of August 2019. (Published on August 7, 2019).

Recent Data Trend

The Reserve Bank of India (RBI) in its 3rd Bi-monthly monetary policy meet, 2019-20 cut the policy repo rate by 35 bps to 5.4%, marking its fourth rate cut in the last eight months. The rate cut was in line with market expectations and in tune with other developed and emerging market trends. However, the quantum of rate cut by 35 bps took the market by surprise as the expectations were for 25 bps or a 50 bps rate cut. Consequently, the reverse repo rate stands revised to 5.15%, and the marginal standing facility rate and the bank rate to 5.65%. Also, the MPC has retained its monetary stance to accommodative.

The bold and unconventional rate cut by RBI was guided by a significant slowdown in the Indian economy, reflected by a weakened consumption and industrial activities along with no immediate threat on the inflation front. On the global front, the advanced and emerging economies are faced with a slowdown in economic activities on account of rising geopolitical tensions pertaining to trade majorly.

With the repo rate having been reduced by 75 bps (December 2018- June 2019), the transmission of the successive rate cuts has been fairly trickled-down to the real economy by banks. RBI maintained that the weighted average lending rate (WALR) has improved marginally since the last meeting of the MPC.

Keeping the recent inflation trend, uneven distribution of monsoon and volatility in crude oil prices in mind, RBI has projected CPI inflation at 3.1% for Q2 2019-20. MPC has further projected inflation to remain within the target over a 12-month ahead horizon. It also revised its GDP projections downwards to 6.9% from 7.0% for H1 2019-20.

The RBI's departure from its conventional 25 bps rate cuts is surely a welcome news for the economy which will further help in easing of liquidity situation in the system. This will ultimately boost the aggregate demand and hence GDP via improved investment in the economy.

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: October 4, 2019