Reserve Bank of India (RBI) Monetary Policy Review

As widely expected, MPC maintains Status quo on repo rates at 6.5%.

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

Recent Data Trend

In the fifth bi-monthly policy meet in 2018, RBI offered no surprises and maintained status quo, holding policy repo rate at 6.5%. The Monetary Policy Committee (MPC), kept the benchmark policy rate unchanged for the second consecutive time, on account of fall in crude oil prices, stability in the rupee and lower-than expected inflation level since the last meeting. Consequently, reverse repo rate was unchanged at 6.25% and marginal standing facility (MSF) rate and bank rate at 6.75%.

The decision to maintain status quo comes after all six members of MPC voted in favor on keeping the rates on hold. The decision was also in line with the market expectations (48 out of the 52 economists expected a status quo in the Bloomberg Poll).

In the previous meeting, MPC had changed its stance from neutral to calibrated tightening as there was continued upside risks to inflation (3.77% YoY in Sep'18). This time again, the MPC decided to still hold the calibrated tightening stance as core inflation is still relatively higher at 6.1% YoY, but the headline inflation has remained below 4% since Aug'18.

In terms of MPC's assessments, with regard to inflation projections, the Committee has lowered inflation projections as few risks have been mitigated, especially the fall in crude oil prices, but, it said that several uncertainties still cloud the inflation outlook. Excluding food items, the level of inflation has remained sticky and elevated and output gap has declined. Now, crude oil prices have slipped to around USD 60 per barrel compared to USD 86 per barrel in Oct'18.

With regards to the outlook of the economy, although Q2 GDP growth slowed down to 7.1% YoY, after four consecutive quarters of acceleration, government final consumption expenditure (GFCE) is still strengthening. However, the level of private consumption and growth in agricultural (kharif) output have remained sluggish, affecting the rural wages. Overall, the GDP growth for 2018-19 is expected to grow at around 7.4%. The decline in oil prices, along with improved corporate earnings and higher disposable incomes are expected to boost India’s growth.

Before the MPC announced its stance, the rupee strengthened to 70.46 against USD and the NSE stock index fell by 0.68%.

The decision of the RBI to keep the repo rate unchanged comes with fall in crude oil prices, lower-than-expected inflation and an appreciation in the Indian currency. The Central bank also indicated that it would lower bank's SLR (mandatory bond holding levels by banks) by 25 bps every quarter from Q1 FY19 until it becomes 18%. This decision should allow banks to lend more. The market will also look out for the stance on liquidity as the economy has been facing a liquidity blow in its non-banking financial companies (NBFCs) sector until the next policy meet.

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: February 5th, 2019