Sixth Bi-Monthly Monetary Policy Review – RBI keeps repo rate unchanged at 5.15%

The Reserve Bank of India (RBI) announced its sixth bi-monthly monetary policy statement for 2019-20 today i.e. on 6th February, 2020 in which the repo rate was left unchanged, as was widely expected. The Monetary Policy Committee (MPC), led by Governor Shaktikanta Das, said it has decided to keep the policy repo rate unchanged at 5.15% and persevere with the accommodative stance as long as necessary to revive growth, while ensuring that inflation remains within the target.

The central bank reiterated that it will continue with its stance as long as it was necessary to revive growth, while ensuring that inflation remains within the target. In its review, the MPC noted that even though several parameters indicate improvement in economic activity, the outlook remains subdued. RBI governor Shaktikanta Das on Thursday said the central bank has many other instruments to address the sluggishness the economy, not just interest rates.

  • RBI Governor Shaktikanta Das has kept the policy repo rate unchanged at 5.15% in its monetary policy
  • RBI expects the GDP to grow by 6% next year

Highlights of RBI's sixth bi-monthly monetary policy statement for 2019-20
Following are the highlights of RBI's sixth bi-monthly monetary policy statement, 2019-20:
* Policy rate kept unchanged at 5.15 pc
* GDP growth for 2020-21 fiscal pegged at 6 pc
* Upward bias expected in overall food prices on account of vegetables, pulses
* Accommodative stance to revive growth maintained; inflation to remain elevated in short-run
* Retail inflation projection revised upwards to 6.5 pc for January-March quarter
* Breakout of Coronavirus may impact tourist arrivals, global trade
* Rationalisation of personal income tax rates in the 2020-21 Budget to support domestic demand
* Need for adjustment in interest rates on small saving schemes outlined
* Pricing of loans by banks for the medium enterprises to be linked to an external benchmark effective April 1
* Time for restructuring of GST-registered MSME loans extended till December 2020, from March 2020 at present
* Revised regulations for housing finance companies to be issued
* RBI to periodically publish a composite 'Digital Payments Index' (DPI) from July 2020 to capture the extent of digitisation of payments
* Framework for a Self-Regulatory Organisation (SRO) for digital payments to be issued
* Pan India Cheque Truncation System (CTS) to be made operational by September
* Extension of date of commencement of commercial operations of project loans for commercial real estate, delayed for reasons beyond the control of promoters, by one year, allowed
* Crude prices likely to remain volatile
* Foreign exchange reserves stood at USD 471.4 billion on February 4, 2020
* Net FDI rose to USD 24.4 billion in April-November 2019, against USD 21.2 billion a year ago
* Net foreign portfolio investment (FPI) stood at USD 8.6 billion in 2010-20 (till February 4) as against net outflows of USD 14.2 billion in the year ago period
* All six members of Monetary Policy Committee vote in favour of maintaining status quo on interest rate
* Next meeting of the MPC scheduled during March 31, April 1 and 3, 2020.

Here are 10 key takeaways from the first MPC meet of 2020:
FY21 GDP projection at 6%
The committee pegged India to grow at the rate of 6 per cent in financial year 2021. The GDP may grow in the range of 5.5-6.0 per cent in the first half and 6.2 per cent in Q3FY21. The committee said the rationalisation of personal income-tax rates in Budget 2020-21 should support domestic demand along with measures to boost rural and infrastructure spending.
Space for future action
The MPC recognised that there is policy space available for future action, but it will be dictated by the path of inflation and any change in the economic parameters. “Economic activity remains subdued and the few indicators that have moved up recently are yet to gain traction in a more broad-based manner. Given the evolving growth-inflation dynamics, it was appropriate to maintain the status quo, the committee observed.
Coronavirus impact
The MPC in its outlook said the rapid spread of the coronavirus that has already taken over 500 lives may hit India’s gross domestic product (GDP). The committee said the virus may impact tourist arrivals and global trade.
Inflation projections shoot up
The committee revised CPI inflation projection upwards to 6.5 per cent for the current quarter and 5.45 per cent for the first half of FY21. It also revised the projection for the third quarter of FY21 to 3.2 per cent, with risks broadly balanced.

The MPC noted that inflation is likely to be tempered by hardening of prices of other food items, notably those of pulses and proteins, despite an easing onion prices. “Going forward, the trajectory of inflation excluding food and fuel needs to be carefully monitored as the pass-through of remaining revisions in mobile phone charges, the increase in prices of drugs and the impact of new emission norms play out and feed into inflation formation,” it added.
Rural income likely to grow
The central bank said rural income will grow supported by the recent rise in food prices that has shifted the terms of trade in favour of agriculture. Similarly, private consumption, particularly in rural areas, is expected to recover on the back of improved rabi prospects, the bank added.
Small saving schemes rate tweak needed
The MPC in a passing reference said that there is a need for adjustment in interest rates on small saving schemes. During the current quarter, the government refrained from cutting interest rates on small savings schemes, including Public Provident Fund (PPF) and National Savings Certificate (NSC), despite moderating bank deposit rates.
Department of Economic Affairs Secretary Atanu Chakraborty in a recent interview hinted at revision in small savings rate next quarter, in line with market rate.
People inflation expectations ease
Households’ inflation expectations eased in January round of the Reserve Bank’s survey, the MPC said in a statement. Three-month ahead and one-year ahead inflation expectations fell 60 basis points (bps) and 70 bps, respectively. This comes after a sharp pick-up in the previous round.
December 2019 round of the Reserve Bank’s industrial outlook survey suggested that the input and output prices of manufacturing firms remained subdued in Q3FY20 and are likely to remain so in the current quarter as well.
Rabi sowing higher
Rabi sowing has been 9.5 per cent higher up to January 31 compared with a year ago. Based on the first advance estimates, horticulture production is estimated to have risen 0.8 per cent to a record level in 2019-20. Similarly, production of vegetables is estimated to have increased 2.6 per cent in 2019-20 due to higher production of onions, potatoes and tomatoes, the committee noted.
High frequency indicators turn up
The committee said several high frequency indicators of services have turned upwards in the recent period, pointing to a modest revival in momentum. Though, it added that the outlook was still muted.
Tractor sales grew 2.4 per cent in December, while domestic air passenger traffic – an indicator of urban demand – posted double digit growth in November, followed by a modest growth in December. Growth in three-wheeler sales and railway freight traffic has accelerated, while port traffic turned around in December. The PMI services index improved to 55.5 in January 2020 from 52.7 in November 2019, boosted by a rise in new business and output.
Unanimous decision
The decision to hold rates was unanimous. All six members of the committee — Chetan Ghate, Pami Dua, Ravindra H Dholakia, Janak Raj, Michael Debabrata Patra and Shaktikanta Das — voted in favour of the decision. The minutes of the MPC’s meeting will be published on February 20. The next meeting of the MPC is scheduled during March 31-April 3.

RBI Monetary Policy Updates

  • RBI said the decision to conduct new one-year and three-year repos worth ₹1 lakh crore, will ensure better monetary policy transmission by enabling banks to reduce lending rates.
  • Arun Singh, Dun and Bradstreet India: “The RBI’s move to keep policy rate and monetary stance unchanged will help in controlling inflationary expectations and providing support to growth. The sharp rise in the inflation rate has constrained monetary policy rate cut. Now, RBI’s focus has to be on the monetary policy transmission in credit market as the full benefit of rate cut has not been passed to consumer yet. Lower lending rate will provide some respite to investment rate and growth going forward. The surging inflation and slowing growth are raising serious concerns about the future growth prospects of the economy."
  • "Over the coming weeks and months, onion prices are likely to ebb as supply conditions improve," RBI MPC said.
  • RBI has no plans to monetise fiscal deficit: Shaktikanta Das
  • RBI said the increase in limit of deposit insurance is not likely to impact the balance sheet of banks much due to the increase in premium outgo. The premium for bank deposits is being increased to 12 paise from 10 paise for the time being.
  • Shubhada Rao, chief economist, Yes Bank: "The RBI's rate decision is in line with expectations." It is likely to maintain a status quo in the near term. With an inflation forecast of 3.2% factored in for Q3 FY21, in conjunction with our forecast, we expect RBI rate action in October 2020 monetary policy. (We) expect 25 bps rate cut then."
  • The RBI governor said continuity in policy from last pause should not be read as a pointer to future actions. "While the decision is as per expectations, it is important not to discount RBI," Das said.
  • Rumki Majumdar, Economist, Deloitte India: "As had been expected by us, the RBI decided not to cut rates and to be in a wait-and-watch mode in the Feb policy meeting while continuing on with an ‘accommodative’ stance. This is because inflationary nor demand pressures for goods other than food in the near future may remain low owing to weak demand and excess capacity issues. The expansionary monetary policy stance was necessary and is an assurance that there will be no reversal of easing and that the RBI will not hike rates immediately".
  • The current slowdown in the economy is driven by liquidity issues, slow credit off-take, and weak rural demand. Therefore, if the RBI chooses to adopt ‘neutral’ stance, it might impact liquidity and lending further.
  • RBI Governor Shaktikanta Das said the central bank has many instruments to address the sluggishness the economy and not just interest rates.
  • On the outbreak of coronavirus in China, RBI Governor said it may impact tourist arrivals and global trade.
  • "By keeping the stance at accommodative, by granting CRR exemption against the loans given to the stressed sectors and extending a one-time restructuring for MSMEs, etc, the policy has strengthened the stimulus package announced by the Union Budget," Rupa Rege Nitsure, group chief economist, L&T Financial Holdings, said.
  • RBI Governor said headline inflation has now peaked and is now expected to go down.
  • Chokkalingam G, head of Equinomics Research & Advisory, said RBI's policy is on expected lines and has kept some room to cut rates in the future, which will give some boost to the market.
  • From February 15, RBI will conduct term repos of one-year and three-year tenors of appropriate sizes for up to a total amount of ₹1,00,000 crore at the policy repo rate.
  • The share market rose after RBI MPC meeting. Sensex climbed 0.4% to 41,297.81 as of 12:14 pm while the Nifty advanced 0.3%.
  • To give a fillip to digital banking and enabling regional rural banks (RRBs) to provide cost effective and user-friendly solutions to their customers, it has been decided to allow RRBs, like other commercial banks, to act as merchant acquiring banks, using Aadhaar Pay – BHIM app and POS terminals.
  • Monetary transmission across various money market segments and the private corporate bond market has been sizable, RBI Governor Shaktikanta Das said.
  • The Reserve Bank said it will put in place a framework for establishing a Self-Regulatory Organisation (SRO) for digital payment system by April 2020. This will foster best practices on security, customer protection and pricing, among others.
  • RBI has decided to link interest rate of loans given to medium enterprises also to an external benchmark from April.
  • RBI said the monetary transmission has improved in sectors where new floating rate loans have been linked to the external benchmark.
  • "Economic activity remains subdued and the few indicators that have moved up recently are yet to gain traction in a more broad-based manner. Given the evolving growth-inflation dynamics, the MPC felt it appropriate to maintain status quo," the Monetary Policy Committee (MPC) said.
  • Clearing of cheques could soon be faster as the RBI has decided to extend the Cheque Truncation System (CTS) to all over India.
  • The MPC has observed that the economy continues to be weak and the output gap remains negative.
  • RBI said overall the inflation outlook remains highly uncertain. "Accordingly, the MPC will remain vigilant about the potential generalisation of inflationary pressures as several of the underlying factors cited earlier appear to be operating in concert," the MPC said in its statement.
  • RBI MPC policy statement blames the unusual spike in onion prices for the surge of inflation above the upper tolerance band around the target in December 2019.
  • The RBI has revised CPI inflation projection upwards to 6.5% for Q4 of 2019-20, 5.4-5% for H1 of 2020-21; and 3.2% for Q3 of 2020-21, with risks broadly balanced.
  • GDP growth for FY 2020-21 has been projected at 6% – in the range of 5.5-6% in H1 and 6.2% in Q3
  • RBI said 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.
  • The RBI is not expected to cut interest rates before June.
  • “The MPC will weigh limited explicit fiscal support for growth, still mixed signs of growth pickup and emerging headwinds to growth from global developments such as the health scare in China," said A. Prasanna, chief economist at ICICI Securities Primary Dealership in Mumbai. “In this backdrop, the MPC might decide to wait for more data and clarity before making up its mind in April."
  • RBI can raise its near-term forecasts after inflation surged to 7.35% in December, the fastest pace in more than five years. The RBI’s previous projection was for price growth of 4.7%-5.1% in the six months through March 2020 and 3.8%-4% in the first half of the next fiscal year.
  • All 37 economists in a Bloomberg survey predict the benchmark repurchase rate will stay at 5.15%, the lowest level since 2010.
  • Investors will be looking for cues related to economic growth from the RBI statement.
  • RBI's MPC meeting comes just after the release of the Budget and Economic Survey.

The RBI made it easier and worth the while of banks to increase lending to housing, auto and small businesses by reducing cost through a waive off on cash reserve ratio. CRR is a regulatory tax wherein banks have to set aside a portion of their deposits with the central bank. Now if they lend to housing or small businesses, they don’t have to do it to the extent of their loans to these.

What’s more, the central bank has guaranteed long term liquidity of up to ₹1 trillion at a cheap price through long term repos of one-year and three-year to banks.

The Reserve Bank of India projected the economy to expand by 6 per cent during the next financial year, pegging it at the lower end of the GDP growth estimate of the Economic Survey. The survey, tabled in Parliament last month, estimated the GDP growth during FY21 at 6-6.5 per cent.

Please click on the following link for detailed report : Sixth Bi-monthly Monetary Policy Statement, 2019-20 Resolution of the Monetary Policy Committee (MPC) Reserve Bank of India

Source:, Economic Times, Business Line, Live Mint, Business Standard & Financial Express

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