Reserve Bank of India (RBI) Monetary Policy Review

RBI keeps policy rate status quo at 6% in December 2017 policy meet.

Published bi-monthly by the Reserve Bank of India (RBI). Updated to the month of December 2017. (Published on December 6th, 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

In the fifth bi-monthly policy meeting held on December 6th, the Monetary Policy Committee (MPC) decided to keep the policy repo rate unchanged at 6%, largely in line with market expectations. The bank rate and the reverse repo rates also remained unchanged at 6.25% and 5.75%, respectively. The decision was arrived at with five members of the Monetary Policy Committee(MPC) voting in favor of the monetary policy decision and one member voting against it (Ravindra Dholakia).

The decision comes on the back of an acceleration in retail inflation and a recovery in economic growth. Since the previous RBI policy meeting on October 4, the constellation of recent economic data did not leave much room to cut policy rates in the year-ending meet of 2017.

The Consumer price index (CPI) inflation edged up to a 7-month high of 3.58% YoY in October, inching closer to the medium-term target of 4%. The pick up in momentum was mainly led by a rise in food inflation coupled with housing and fuel group inflation. Additionally, the latest GDP growth figure for the quarter ending September saw a rebound to a 6.3% YoY growth, following five consecutive quarters of deceleration. It was powered by a sharp acceleration in industrial activity (5.8% YoY). All the three sub-sectors of industry registered higher growth. With growth rebounding and inflation trajectory on the upside, RBI's tone of the policy guidance was largely neutral, in line with market expectations. (Mint Poll)

In terms of MPC's assessment, they acknowledged two significant developments which will augur well for growth prospects, namely, the improvement in the ease of doing business ranking and recent changes to the insolvency and bankruptcy code (IBC). As regards to the outlook of the economy, the MPC retained its projection of the real GVA growth rates at 6.7% for 2017-18 after accounting for improvement in demand, financial conditions and the overall business situation in Q4. However, RBI raised its inflation projection to a range between 4.3-4.7 percent for the last two quarters of 2017-18 (including impact of House Rent (HRA) allowance by the Centre). Going forward, they also reiterated the risk that this upward trajectory in inflation may continue in the near-term (due to HRA allowances and hardening of international crude oil prices).

While an interest rate cut would be welcomed by the government and corporates likewise, it is unlikely to be sufficient to rekindle the investment activity. With the gradual rise in currency in circulation (growth in money supply, 6.5% YoY in October) and non-food bank credit (6.6% YoY in October), liquidity situation in the banking system has tightened considerably. In our view, the fear of fiscal slippages and the subsequent resolution of stressed public sector balance sheets over the upcoming periods leave less room for a rate cut in the upcoming February 2018 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 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 7th, 2018