Reserve Bank of India (RBI) Monetary Policy Review

RBI lowers the repo rate by 25 bps to 6% and cuts GDP forecast to 7.2% for FY20.

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

Recent Data Trend

In the first bi-monthly policy meet in 2019, RBI cut the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 6% from 6.25%. The rate cut has been in tandem with the market expectations amid benign inflation and slowdown in growth. This is the second consecutive time that the RBI's Monetary Policy Committee (MPC) has cut the interest rates after a surprise rate cut in February 2019. Consequently, the reverse repo rate stands adjusted to 5.75% and Marginal Standing facility rate (MSF) were fixed at 6.25%.

The MPC decided to maintain a neutral stance with five members of the MPC voting in favour of retaining the stance to neutral and one member voting against it. The MPC's decision to maintain the neutral stance will give the much needed thrust to the economic growth. Along with this, CPI inflation has remained well within the RBI's 4% target since the last seven months which signaled for a continued neutral stance of RBI.

The retail inflation rose to 2.6% in February 2019 driven by an increase in prices of items excluding food and fuel along with a weaker momentum of deflation in the food group. Although the core inflation (inflation excluding food and fuel) rose to 5.4% in February 2019 it has remained lower than expected. The RBI projected the CPI inflation to be around 2.4 % for Q4FY19 and 2.9-3% for H1 FY20 compared to its earlier projection of 2.8% for Q4FY19. Given the fact that there has been an upward pressure on oil prices (rose by around 10% since the last policy meet), increase in consumer and general spending, and an increase in food prices are likely factors that can influence the inflation path during 2019-20.

In addition to this, the latest GDP growth figure for the quarter ending December 2018, saw a slowdown to 6.6% YoY growth, due to a decline in consumption. In terms of future growth forecasts the RBI projected a 7.2% YoY growth for 2019-20 and growth to be in the range of 6.8-7.1% in H1FY20. It said that moderation of growth in the global economy might impact India's exports. Since the growth rate has been lowered for FY20 along with benign inflation scenario one can expect further rate cuts in the near future.

While the projections for CPI inflation were revised down, the MPC has highlighted several upside risks like the likelihood of higher food prices, moderation in inflation expectations of households and prospects of upward movement in oil prices. In light of the revisions put forward by the MPC and continuing to maintain neutral stance there stands a chance for further rate cut in the next meeting.

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: June 6th, 2019