Key highlights of Monetary Policy

Please find below the Key Highlights of the Fifth Bi-monthly Monetary Policy Statement, 2018-19.

  • Repo Rate – unchanged at 6.50%                    
  • Reverse Repo Rate – unchanged at 6.25%
  • Bank Rate & Marginal Standing Facility (MSF) Rate  – unchanged at 6.75%
  • Cash Reserve Ratio – The CRR of scheduled banks remains unchanged at 4.0% of their net demand and time liabilities (NDTL).

 In a widely expected decision, RBI kept both the policy repo rate and stance unchanged at 6.5% and “calibrated tightening”, respectively. Despite this, there was a dovish tilt expressed in the post policy press conference wherein the governor Dr. Patel mentioned that if upside risks to inflation doesn’t materialise, it will open up space for commensurate policy actions.

RBI ruled out CRR cut in response to tight liquidity and hinted at more OMOs in Jan-Mar quarter to ensure adequate liquidity.

Key Highlights of the Policy Statement

  • There was a sharp decline in inflation forecast with 1HFY20 inflation projected at 3.8-4.2%, compared to 4.8% projection in 1QFY20 in the last policy. The drop was very sharp and attains more significance if read in conjunction with post policy statement from RBI. Near term inflation projection for 2H FY19 was also reduced sharply from 3.8-4.5 to 2.7-3.2.
  • RBI flags that risk to inflation are on upside. They are: 1) Food inflation unusually low and risk of reversal 2) Crude price uncertainty and volatile global markets and 3) Fiscal slippage and elevated 1-year ahead household inflation expectation.
  • FY2019 GDP growth estimate retained at 7.4% and 1HFY20 GDP growth estimated at 7.5% but with risks on the downside.
  • The key downside risks to growth comes from lower rabi sowing, financial market volatility and slowing global demand, and rising trade tensions. However, on the positive side, decline in crude prices, increasing capacity utilisation, acceleration in investment activity and rising credit offtake augur well for growth prospects.
  • The MPC also noted that escalating trade tensions, tightening of global financial conditions and slowing down of global demand pose some downside risks to the domestic economy, the decline in oil prices in recent weeks, if sustained, will provide tailwinds.

 

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