October 04 2017

Reserve Bank of India (RBI) Monetary Policy Review

RBI keeps repo rate unchanged at 6%, maintaining its neutral stance on monetary policy.


Published bi-monthly by the Reserve Bank of India (RBI). Updated to the month of October 2017. (Published on October 4th, 2017).
Note: Real Interest Rate has been calculated using 364 day T-bill rate as reference and CPI inflation rate. For 2012-January, February, April and November policy repo rates have been used in place of T-bill rate due to unavailability of data.

Recent Data Trend

The Reserve Bank of India in its fourth bi-monthly policy meeting on October 4th, 2017, decided to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.0%, as per market expectations. The decision was reached with five members of the Monetary Policy Committee(MPC) voting in favor of the monetary policy decision and one member voting against it. Accordingly, the reverse repo rate under LAF was also unchanged at 5.75%. The Marginal Standing Facility and the Bank Rate was fixed at 6.25%.

The decision of the MPC is consistent with the neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2% while supporting growth. In August 2017, the headline CPI inflation reached a five-month high of 3.36% YoY, after hitting an unusual low of 1.46% in June 2017. This was due entirely to a sharp pick up in momentum as the favorable base effect tapered off in July and disappeared in August. The committee projected inflation to be around 4.0-4.5% in the second half of 2017-18.

The MPC acknowledged the significant slowdown of growth in the first quarter of 2017-18. In the April-June quarter of 2017-18, the GVA growth was 5.5% YoY which was cushioned partly by the extensive front-loading of expenditure by the central government. According to the RBI, two factors will contribute to the setback in the growth rates. Firstly, the implementation of GST has had an adverse impact, rendering prospects for the manufacturing sector uncertain in the short term which may delay the revival of investment activity, which is already hampered by stressed balance sheets of banks and corporates. 

Secondly, uneven spatial distribution of the monsoon has affected the production of kharif crops adversely. In the light of these developments, the GVA estimates for 2017-18 has been revised down to 6.7% from the August 2017 projection of 7.3%, with risks evenly balanced.

The decision of the RBI to keep the repo rate unchanged goes against what the government was hoping for. The piling up NPA of the banking sector and low corporate earnings are hampering GDP growth, which has been a mounting problem for the current government. The RBI is expected to keep the repo rate unchanged until the process of balance sheet cleanup of various banks is not completed.

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 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 6th, 2017