The Reserve Bank of India (RBI) has unveiled its first bi-monthly Monetary Policy Statement for the financial year 2019-20. The central bank’s Monetary Policy Committee (MPC) is at the helm of these policy decisions, which includes modifications to the Liquidity Adjustment Facility (LAF) and changes to interest rates.
LAF Adjustment and Effect on Economy
In an important move, the MPC decreased the policy repo rate under the LAF by 25 basis points from 6.25% to 6.0% effective immediately. This adjustment led to a reduction in the reverse repo rate under the LAF to 5.75% and adjusted the marginal standing facility (MSF) rate and the Bank Rate to 6.25%. Notably, this is the second consecutive rate cut in 2019 after February, under the guidance of new RBI Governor Shaktikanta Das.
The repercussions of a rate cut by RBI primarily include the injection of liquidity into the economy. It serves as an encouragement and provides relief to companies grappling with large debts. It is anticipated that sectors like banking, Non-Banking Financial Company (NBFC), infrastructure, and real estate will gain the most from a rate cut.
Maintaining a Neutral Monetary Policy Stance
Moreover, the MPC made the decision to maintain the neutral monetary policy stance. The neutral stance signifies that the policy rates don’t have any significant influence in accelerating or slowing down economic growth.
Quick Facts
| Policy | Rate |
|---|---|
| Repo Rate | 6.0% |
| Reverse Repo rate | 5.75% |
| MSF rate | 6.25% |
| Bank Rate | 6.25% |
Inflation Targeting and concern
MPC’s decision is in line with the target to achieve a consumer price index (CPI) inflation of 4% within a band of +/- 2%, while also supporting growth. These targets were recommended by a committee led by Urjit Patel in 2014, which also proposed the formation of the MPC.
Significantly under control, current inflation stands at 2.6% and is projected to average between 3.2% and 3.4% in the first half of 2019-20, figures that are below the MPC’s target. There are, however, certain looming concerns: early forecasts predict a strong possibility of below-normal monsoon due to El Niño, causing potential effects on agricultural output and food prices.
GDP Growth Reduction
The MPC has revised the GDP growth downwards for 2019-20 from the projected 7.4% to 7.2% as of February policy meet. This revision is attributed to indicators of weakening domestic investment activity and a slowing growth in the global economy which might impact India’s exports. Also, the Central Statistics Office revised the GDP growth for 2018-19 downwards to 7%.
Linking Loans and Retail Loans Decision On Hold
RBI, at this juncture, has also decided to further deliberate on the proposal to link retail loans with an external benchmark for bettering monetary transmission. As of now, all existing loans are linked to the Marginal Cost of Fund based Lending Rate (MCLR). The system of linking floating rate personal or retail loans, and floating rate loans to Micro and Small Enterprises, to an external benchmark was proposed during the December review of monetary policy, slated to be implemented from April 1, 2019. This process, intended to make the transmission of policy rates transparent, is currently on hold for further consultation.
