Reserve Bank of India (RBI) Monetary Policy Review

RBI cuts rate by 25 bps and changes stance to accommodative in June policy meet.

Published bi-monthly by the Reserve Bank of India (RBI). Updated to the month of June 2019. (Published on June 6, 2019).

Recent Data Trend

The Reserve Bank of India (RBI) in its 2nd Bi-monthly monetary policy statement cut the policy repo rate by 25 basis points to 5.75% in tandem with the market expectations. This marked the third rate cut by the RBI in six months. RBI had lowered its repo rate in February'19 and April'19. The monetary policy committee (MPC) shifted its stance to accommodative from neutral.

Since the last MPC meeting, global trade has been losing pace because of the ongoing tariff wars. In the emerging markets, crude oil prices continued to remain volatile, and the US dollar strengthened on more than expected growth in Q1 2019.

In the June policy meeting, the MPC acknowledged the concern over a sharp slowdown in investment activity and the continued moderation in private consumption. The Committee also pointed out that the headline inflation remained below the target even after taking into account the expected transmission of previous rate cuts. The headline inflation increased to 2.92% YoY in April, though it remained below the RBI's medium-term target for the ninth consecutive month.

Immediately after the MPC announced the rate cuts, the 10-year bond yield fell to 6.8% while Sensex and Nifty fell to 39904.93 and 11949.35 respectively.

In terms of MPC's assessments, India's exports and investment activity could see a further impact due to weak global demand as a result of escalation in the trade war. The GDP growth projections was cut to 7% YoY from 7.2% YoY for FY2020. With regard to inflation projections, the RBI marginally raised its retail inflation outlook for H1 FY2020 to a range of 3%-3.1% YoY.

RBI's policy action was apt, given the slowdown in the economy coupled with lower risks to inflation. Transmission of the cumulative reduction of 50 bps in the past policy rates was 21 bps to weighted average lending rate on fresh loans. This reflects a partial transmission of the reduction in the policy rate. Unless RBI ensures more liquidity and transmission of the rate cuts into bank lending rates and money markets, an expansive monetary policy will hardly have any impact on the economy in the near term.

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: August 7, 2019