Reserve Bank of India (RBI) Monetary Policy Review

RBI cuts repo rate by 25 bps to 5.15% in its fourth Bi-monthly policy meet.

Published bi-monthly by the Reserve Bank of India (RBI). Updated to the month of October 2019. (Published on October 4, 2019).

Recent Data Trend

With the continuous downturn in the economy, the reserve bank of India provided an additional boost by reducing the repo rate by 25 bps for the fifth time in a row. The rate cut was in line with market expectations. However, the market was divided over the quantum of rate cut. Consequently, the repo rate under the LAF stands revised to 5.15%, and the marginal standing facility rate and bank rate to 5.40%. Also, with retail inflation still within RBI's target range, it retained its accommodative stance giving a strong signal for further rate cuts in the future to revive growth.

With the GDP growth figures slipping to a six-year low of 5% in Q1: 2019-20 along with deteriorating global growth prospects amid rising geo-political tension, RBI made a downward revision to its growth projections from 6.9% in August policy to 6.1% currently. Furthermore, keeping the recent inflation trend, uneven distribution of monsoon and volatility in crude oil prices in mind, RBI slightly revised its CPI inflation projection to 3.4% for Q2 2019-20 from 3.1% projected earlier.

The RBI claimed that despite the reductions in repo rate so far, the transmission of policy rate cuts to the lending rates of banks has not been satisfactory. The weighted average lending rate on fresh rupee loans of commercial banks has only declined by 29 bps against a cumulative rate cut of 110 bps during Feb-Aug'2019. However, RBI has made it mandatory for banks to link their retail and SME loans to external benchmarked loans in October. This will help in quicker transmission of rate cuts going forward.

As RBI considers 1.25% as neutral interest rate, and the real rate still hovers around 2% (Real Rate = Nominal interest rate-inflation), there remains room for further rate cuts. However, given the backdrop of government revenue foregone amounting to Rs 1.45 trillion and the persistently falling GST collections, RBI should not ignore the downside implications of probable fiscal slippage.

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 5, 2019