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Indian Economy

RBI Monetary Policy

  • 07 Jun 2019
  • 3 min read

In its second bi-monthly monetary policy statement for 2019-20, the Reserve Bank India’s Monetary Policy Committee (MPC) has unanimously decided to cut the policy repo rate by 25 basis points and change the monetary policy stance from ‘neutral’ to ‘accommodative’.

  • This is the third time successively that the six-member MPC has decided on a 25-basis points rate cut. The last time the RBI had to cut rates three times in a row was in 2013.

Highlights

  • Following the MPC decision, the repo rate now stands at 5.75% against 6% earlier.
  • The reverse repo rate under the LAF (liquidity adjustment facility) has been adjusted to 5.50%, and the marginal standing facility (MSF) rate and the bank rate to 6.0%.
  • The GDP growth for 2019-20 has been revised downwards from 7.2% in the April policy to 7%.

Reasons for Rate Cut

  • To spur economic activity, which decelerated sharply in the January-March quarter.
    • Weakening of growth, as reflected in a further widening of the output gap (the difference between the actual output of an economy and its potential output) compared to the April 2019 policy.
  • The Rate cut will ensure that adequate liquidity is available in the system for all productive purposes. Moreover, an accommodative stance basically means that rate increase is off the table.
    • This will be more comforting for the market than just a rate cut, especially in light of the slowdown.
  • The headline inflation trajectory remains below the target mandated to the MPC even after taking into account the expected transmission of the past two policy rate cuts.
    • Hence, there is scope for the MPC to accommodate growth concerns by supporting efforts to boost aggregate demand, and in particular, reinvigorate private investment activity, while remaining consistent with its flexible inflation targeting mandate.
  • This transmission (of repo rate cut into lending rates) will naturally find its impact on consumer loans, consumer durables loans, two-wheeler loans, etc.
  • Additionally, the RBI said that it has decided to do away with charges levied on Real-time gross settlement (RTGS) and National Electronic Funds Transfer (NEFT) transactions, banks will be required to pass this benefit to their customers.
    • The RBI has also decided to set up a committee involving all stakeholders, under the chairmanship of CEO Indian Banks' Association (IBA), to examine the entire gamut of ATM charges and fees.
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