RBI Releases 5th Bi-Monthly Monetary Policy, Repo Rate Unchanged at 6.5%

The RBI (Reserve Bank of India) on Wednesday, 5 December 2018, in its fifth bi-monthly Monetary Policy Committee (MPC) meeting kept the repo rate unchanged at 6.5 per cent and decided to continue with stance of “calibrated tightening”. “On the basis of an assessment of the current and evolving macroeconomic situation at its meeting today, the Monetary Policy Committee (MPC) decided to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.5 per cent,” RBI said in a release on Wednesday.

“Consequently, the reverse repo rate under the LAF remains at 6.25 per cent, and the marginal standing facility (MSF) rate and the bank rate at 6.75 per cent,” RBI said further.

RBI Monetary Policy December 2018: 5 key takeaways

Stance

Governor Urjit Patel-led six-member MPC decided to proceed with stance of calibrated tightening with an “objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth”. According to RBI, in many key emerging market economies, however, inflation has risen, though the recent retreat in crude oil prices, tightening of policy stances by central banks and stabilising of currencies may have a salutary impact, going forward. Dr Ravindra H Dholakia was the only member who voted to change the stance to ‘neutral’.

Inflation

The Reserve Bank of India lowered CPI-based inflation projection between the range of 2.7 and 3.2 per cent for second half of the financial year 2018-2019 following the normal monsoon and moderate food prices. The RBI, in its October 2018 Monetary Policy review, projected the retail inflation in the range of between 3.9 and 4.5 per cent for October-March period of FY19. "Taking all these factors into consideration and assuming a normal monsoon in 2019, inflation is projected at 2.7-3.2 per cent in H2 FY2018-19 and 3.8-4.2 per cent in H1 FY2019-20, with risks tilted to the upside," the RBI stated.

GDP

The Reserve Bank of India retained the GDP growth projection for the financial year 2018-2019 at 7.4 per cent. For the first half of the financial year 2019-2020, RBI projected the GDP at 7.5 per cent. According to RBI, the GDP growth slowed down to 7.1 per cent in the second quarter of the financial year 2018-2019 due to “moderation in private consumption and a large drag from net exports”. “Private consumption slowed down possibly on account of moderation in rural demand, subdued growth in kharif output, depressed prices of agricultural commodities and sluggish growth in rural wages,” RBI stated.

Liquidity

According to RBI, there was large currency expansion in October and especially during the festive season in November while it contracted in each of the last three weeks of November. “The Reserve Bank injected durable liquidity amounting to Rs 360 billion in October and Rs 500 billion in November through open market purchase operations, bringing total durable liquidity injection to Rs 1.36 trillion for 2018-19. Liquidity injected under the LAF, on an average daily net basis, was Rs 560 billion in October, Rs 806 billion in November and Rs 105 billion in December (up to December 4),” RBI said.

Dissent

According to RBI, even as 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 growth prospects. “The time is apposite to further strengthen domestic macroeconomic fundamentals,” RBI noted. The fiscal discipline is critical to create space and crowd in private investment activity, RBI said, adding, lower rabi sowing may adversely affect agriculture and rural demand.

The Reserve Bank of India’s sixth and last bi-monthly Monetary Policy Committee meeting in FY19 has been scheduled on 5 to 7 February 2019. Source

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