RBI maintains status quo: Key takeaways from fifth bi-monthly policy meet

Reserve Bank of India | File Photo
In line with expectations, the Monetary Policy Committee (MPC) of Reserve Bank of India (RBI) kept the repo rate unchanged at 6.50 per cent in its fifth bi-monthly monetary policy decision of FY19 on Wednesday. The reverse repo rate, also remained unchanged at 6.25 per cent. However, it announced statutory liquidity ratio (SLR) will go down by 25 bps every quarter from January. The marginal standing facility (MSF) rate and the Bank Rate stand at 6.75 per cent.

Here's a look at the top key takeways from the policy meet -

Inflation projection lowered: Inflation has been projected at 2.7-3.2 per cent for second half of FY2018-19 and 3.8-4.2 per cent for the first half of FY 2019-20, with risks tilted to the upside. "Although recent food inflation prints have surprised on the downside and prices of petroleum products have softened considerably, it is important to monitor their evolution closely and allow heightened short-term uncertainties to be resolved by incoming data," the statement added. RBI Governor Urjit Patel said fall in crude oil prices will impart downward bias to inflation trajectory. Oil prices have fallen nearly 30 per cent after hitting a high of $86/barrel early October.

SLR lowered to align with Liquidity Coverage Ratio: In order to align the SLR with the LCR requirement, the MPC decided to reduce the SLR by 25 basis points every calendar quarter until the SLR reaches 18 per cent of Net Demand and Time Liabilities (NDTL). The first reduction of 25 basis points will take effect in the quarter commencing January 2019. Currently, SLR stands at 19.5 per cent. SLR refers to the share of bank’s total deposit that it needs to maintain itself as liquid assets.

Sujan Hajra, Chief Economist at Anand Rathi Financial Services, said "Calibrated reduction of SLR announced in the policy today is in line with the long-term strategy of the RBI to scale down pre-emption of bank resources by the government without undermining quality of bank balance sheet. This step, however, may harden yields in the government securities market as the process would allow banks to reduce government security holding cumulatively to the tune of Rs 2 trillion. Barring large unexpected developments, we expect the RBI to remain in the pause mode for the reminder of FY19."

Maintains 'calibrated tightening' stance: The central bank maintained 'calibrated tightening' stance that it adopted in October 5 policy citing 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. Calibrated Tightening means rate cut is off the table this cycle. It also means "we are not bound to increase interest rates every meeting, because that's not needed," RBI Governor Urjit Patel had explained in the previous meet.  

GDP growth retained at 7.4%: The MPC maintained GDP growth projections for 2018-19 has been projected at 7.4 per cent (7.2-7.3 per cent in H2) as in the October policy, and for H1:2019-20 at 7.5 per cent, with risks somewhat to the downside. It noted that although Q2 growth was lower than that projected in the October policy, GDP growth in H1 has been broadly along the line in the April policy. It said that credit offtake from the banking sector has continued to strengthen even as global financial conditions have tightened. FDI flows could also increase with the improving prospects of the external sector.

Measures to Improve liquidity management by banks: In order to enable banks to forecast their liquidity requirements with a greater degree of precision, it has been decided that RBI will provide information on daily CRR balance of the banking system to market participants on the very next day. At present, the Cash Reserve Ratio (CRR) balance of banks at the end of the day is being disclosed with a lag of 2-3 days, while the details of the currency in circulation are being released with a lag of one week.

Expert committee for MSMEs: MSMEs play a key role in the economy but they remain vulnerable to structural and cyclical shocks, given their predominantly informal nature. Hence, to address the issue, the committee has decided to set up an Expert Committee to identify causes and propose long-term solutions for the economic and financial sustainability of the MSME sector.

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