Fourth Bi-monthly Monetary Policy Statement, 2019-20 – Highlights & Key Takeaways

The Monetary Policy Committee (MPC) of RBI at its meeting today (October 4, 2019) decided,on the basis of an assessment of the current and evolving macroeconomic situation,  to:

  • reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 5.15 per cent from 5.40 per cent with immediate effect.

Consequently, the reverse repo rate under the LAF stands reduced to 4.90 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 5.40 per cent.

  • The MPC also decided to continue with an accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target.

These decisions are in consonance with the 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.

HIGHLIGHTS OF THE MONETARY POLICY:

* Repo rate or short-term lending rate reduced by 25 bps

* Fifth rate cut in 2019

* GDP growth forecast lowered for current fiscal to 6.1 per cent

* RBI continues with its accommodative monetary stance to revive economic growth

* Government stimulus measures to help strengthen private consumption and spur investments

* Continuing slowdown warrants intensified efforts to restore growth momentum

* Retains retail inflation projection for second half of year at 3.5-3.7 per cent

* RBI notes monetary transmission has been staggered and incomplete

* Foreign exchange reserves stood at USD 434.6 bn on October 1, up USD 21.7 bn over March-end 2019

* All members of rate-setting Monetary Policy Committee (MPC) voted for rate cut

* Next monetary policy review meet scheduled during December 3-5, 2019

Key Takeaways from the fourth bimonthly monetary policy statement, 2019-20:

Rate cut

Consequently, the reverse repo rate under the LAF stands reduced to 4.90 percent, and the marginal standing facility (MSF) rate and the bank rate to 5.40 percent.

Stance  

MPC also decided to continue with an accommodative stance as long as it is necessary to revive growth while ensuring that inflation remains within the target.

These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 percent, within a band of +/- 2 percent while supporting growth, RBI said in a statement.

Inflation - Inflation projection rises marginally

The CPI inflation projection revised slightly upwards to 3.4 percent for Q2, while projections are retained at 3.5-3.7 percent for H2 2019-20 and 3.6 percent for Q1 2020-21, with risks evenly balanced.

With the inflation expected to remain below target in the remaining period of 2019-20 and Q1 2020-21, there is policy space to address these growth concerns by reinvigorating domestic demand within the flexible inflation targeting mandate.

“It is in this context that the MPC decided to continue with an accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target,” the note added.

GDP growth - GDP forecast for FY20 cut sharply

Various high-frequency indicators suggest that the domestic demand conditions have remained weak. The business expectations index of the Reserve Bank’s industrial outlook survey shows muted expansion in Q3.

The real GDP growth for 2019-20 revised downwards from 6.9 percent in the August policy to 6.1 percent – 5.3 percent in Q2 2019-20 and in the range of 6.6-7.2 percent for H2 2019-20. The GDP growth for Q1 2020-21 is also revised downwards to 7.2 percent.

Majority decision - All members voted for rate cut

All MPC members voted to reduce the policy repo rate and to continue with the accommodative stance of monetary policy. Dr Chetan Ghate, Dr Pami Dua, Dr Michael Debabrata Patra, Bibhu Prasad Kanungo and Shaktikanta Das voted to reduce the repo rate by 25 basis points. Dr Ravindra H Dholakia voted to reduce the repo rate by 40 basis points.

Monetary transmission - Transmission of rate cuts

The monetary transmission has remained staggered and incomplete. As against the cumulative policy repo rate reduction of 110 bps during February-August 2019, the weighted average lending rate (WALR) on fresh rupee loans of commercial banks declined by 29 bps.

However, the WALR on outstanding rupee loans increased by 7 bps during the same period.

Lending limit increased for NBFC-MFIs - 

NBFC-MFIs plays an important role in delivering credit to those at the bottom of the economic pyramid and enable them to play their assigned role in a growing economy. RBI proposed to revise these criteria for lending.

    1. i) Increase the household income limit for borrowers of NBFC-MFIs from Rs 1 lakh for rural areas and Rs 1.60 lakh for urban/semi-urban areas to Rs 1.25 lakh and Rs 2 lakh, respectively.

(ii) Raise the lending limit from Rs 1 lakh to Rs 1.25 lakh per eligible borrower.

Offshore rupee markets

RBI allows domestic banks to freely offer foreign exchange prices to non-residents at all times, out of their Indian books, either by a domestic sales team or through their overseas branches.

The central bank also allowed rupee derivatives (with settlement in foreign currency) to be traded at International Financial Services Centres.

Liquidity support for NEFT

The Reserve Bank will extend the collateralised liquidity support, available till 7.45 pm on NEFT on working days, round the clock. This will help in better fund management by banks.

Internal ombudsman for large non-bank Prepaid Payment Instrument (PPI) issuers

To strengthen the grievance redressal mechanism at the entity level itself, it has been decided to institutionalise an internal ombudsman scheme at the large non-bank PPI issuers.

The ombudsman is intended to facilitate a swift and cost-effective complaint redressal mechanism within the entity and provide an additional tier for grievance redressal. Instructions in this regard will be issued by October 15.

Crop production estimates brighter
The first advance estimates of major kharif crops for 2019-20 have placed production of foodgrains 0.8 per cent lower when compared with last year’s fourth advance estimates, the committee said. The MPC, however, added that the prospects of agriculture have brightened considerably given an abundance rainfall in August and September. The committee said the agriculture sector is positioned favourably for regenerating employment and income, and the revival of domestic demand.

Industrial activity turns weaker
The MPC noted weakening industrial activity marked by contraction in the output of eight core industries in August, pulled down by coal, electricity, crude oil and cement. The MPC also pointed out that services sector activity weakened during July-August along with the rural demand.

Likelihood of further rate cut.

The committee resolution to “continue with an accommodative stance as long as it is necessary to revive growth” makes a case for further rate cuts as signs of economic growth are not visible. “With inflation expected to remain below target [till June 2021]there is policy space to address these growth concerns by reinvigorating domestic demand within the flexible inflation targeting mandate,” the committee noted.

"The MPC’s view that there is further policy space for accommodation to revive growth clearly indicates that more rate cuts are in the offing. Eventually the Repo rate is likely to settle at 4.75 percent in this rate cut cycle," VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services said.

Global economy
The committee said global economic activity has weakened since the last meeting, highlighting a heightened uncertainty emanating from trade and geo-political tensions continues to cloud the outlook.

MPC cautious on crude oil
MPC expects crude oil prices to remain volatile in the near-term amid a global slowing global demand and persisting geo-political uncertainties that pose some upside risks to the inflation outlook. The committee noted the crude oil prices were pulled down by softer demand, amidst adequate supplies in early August despite an escalating geo-political conflict in September that abated faster than expected.

Next MPC meeting
The next meeting of the MPC is scheduled during December 3-5, 2019. The minutes of this MPC’s meeting will be published by October 18, 2019.

No single-use plastic: RBI has done away with single-use plastic at its premises. The central bank handed out non-plastic cover and non-plastic water bottles to the media representatives present at the press conference.
Source: rbi.org.in, Money Control, Economic Times, Business Standard & Business Line

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