Reserve Bank of India (RBI) Monetary Policy Review

RBI's second emergency rate cut since Covid-19 outbreak began in India.


Published bi-monthly by the Reserve Bank of India (RBI). Updated to the month of May 2020. (Published on May 22, 2020).

Recent Data Trend

India's Monetary Policy Committee (MPC) cut interest rates following an emergency  assessment of the ongoing and evolving macroeconomic situation. Covid-19 pandemic has impacted India's economy severely and we see that this is the second emeregency rate cut since the crisis started. India has now cut interest rates by 115 bps since Covid-19 outbreak began. The RBI has stated that the impact of the pandemic is becoming much more worse than what was initially anticipated.

Following the MPC's review, the policy repo rate stands at an unprecedented low of 4% from 4.4% earlier. Reverse repo rate has been reduced to 3.35% from 3.75%. All MPC members voted for a rate cut of 40 bps and to continue with the accomodative stance. RBI has been following the footsteps of central banks across the globe to boost liquidity in a fight against Covid-19 outbreak.

In terms of MPC's assessments, with regards to inflation projections, the Committee has said headline inflation will remain firm for first half of 2020 due to supply side disruptions. It expects inflation to ease in the second half of FY2020-21, though uncertainty remains. The MPC did not provide any forecasts for inflation.

The policy statement also reads that the economic activity may remain subdued even in the second half of the financial year. Recovery in economy activity is expected in Q3 and it can gain momentum in Q4 as supply lines gradually restore to normalcy. The Committee did not provide growth forecasts for FY2020-21 as much will depend on the pace at which Covid-19 curve is flattened. 

While transmission of rate cut will certainly take time in the system. The decision of the RBI to cut the interest rates can be viewed as important from signalling point of view. It can therefore be said that, it made sense for RBI to cut rates than to wait and see what happens. Along with this, the monetary measures undertaken by the RBI should help bussiness to ease some stress for now.

Latest Policy rates

CRR Rate SLR Rate Repo Rate Reverse Repo Rate
 3  18  4 3.35

 

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: To be awaited.