Fifth Bi-monthly Monetary Policy Statement 2018-19: RBI keeps policy rates unchanged; announces scheme for digital transactions

RBI lowered its inflation forecast based on moderation in food inflation and the sharp decline in international crude oil prices. Accordingly, inflation is projected to be in the range of 2.7 to 3.2 percent in the second half of 2018-19.

Created On: Dec 6, 2018 13:16 ISTModified On: Dec 6, 2018 13:19 IST
Fifth Bi-monthly Monetary Policy Statement 2018-19 RBI keeps policy rates unchanged

The Reserve Bank of India (RBI) on October 5, 2018 released its Fifth Bi-monthly Monetary Policy Statement 2018-19.

After assessing the current and evolving macroeconomic situation in the economy, the six members Monetary Policy Committee (MPC) decided to:

Keep the policy Repo Rate under the Liquidity Adjustment Facility (LAF) unchanged at 6.5 percent.
The Reverse Repo Rate under the LAF remains at 6.25 percent.
The Marginal Standing Facility (MSF) rate and the Bank Rate stand at 6.75 percent.

The decision of the MPC was consistent with the monetary policy 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.


Even after revising its inflation projection on the downside in the Fourth Bi-monthly Monetary Policy Statement, the volatile global markets and the uncertain crude oil prices led to such 'calibrated tightening' policy stance of the RBI.

Highlights of Policy Statement

RBI lowered its inflation forecast based on moderation in food inflation and the sharp decline in international crude oil prices. Accordingly, inflation is projected to be in the range of 2.7 to 3.2 percent in the second half of 2018-19.

Inflation will likely to stay in the range of 3.8 to 4.2 percent in the first half of 2019-20.

RBI retained GDP growth rate projection at 7.4 percent for 2018-19 and at 7.5 percent in the first half of 2019-20.

Lower RABI sowing, slowing global demand and rising trade tensions may adversely affect growth prospects while the decline in crude oil prices is expected to boost India’s growth prospects.

Policies and Initiatives announced by RBI

After releasing the Fifth Bi-monthly Monetary Policy Statement 2018-19, the RBI announced a couple of customer protection policies and initiatives. Have a look at them:

RBI to implement an Ombudsman scheme for digital transactions

As the digital mode of payment is gaining momentum in the country, the RBI felt that there is an emerging need for a dedicated, cost-free and expeditious grievance redressal mechanism for strengthening consumer confidence.

Considering this, the central bank announced to implement an Ombudsman Scheme for Digital Transactions covering services provided by entities falling under Reserve Banks regulatory jurisdiction.

The scheme will be notified by the end of January 2019.

Aligning Statutory Liquidity Ratio with Liquidity Coverage Ratio

The Reserve Bank said that it will reduce the Statutory Liquidity Ratio (SLR) by 0.25 percent every quarter beginning January 2019.

The reduction will continue until it reaches 18 percent from the current 19.5 percent of Net Demand and Time Liabilities (NDTL). The move is likely to release funds locked in government securities and add to lendable liquidity.

The SLR is the portion of funds which banks are required to maintain in the form of cash, gold reserves, the government approved securities before providing credit to the customers.

External benchmarking of new floating rate loans by banks

In a bid to ensure greater transparency, the Reserve Bank proposed that floating interest rates on personal, home, auto and MSMEs loans will be linked to external benchmarks like repo rate or treasury yields.

Currently, banks follow system of internal benchmarks, including Prime Lending Rate, Benchmark Prime Lending Rate, Base rate and Marginal Cost of Funds based Lending Rate. The new system is likely to become operational by 1st April 2019.

The banks shall decide the benchmark rate system to be followed right at the inception of the loan and it should remain unchanged through the life of the loan. The adoption of multiple benchmarks by the same bank will not be allowed within a loan category.

The external benchmarking was recommended by the Internal Study Group to Review the Working of the Marginal Cost of Funds based Lending Rate (MCLR) System, chaired by Dr Janak Raj.

The final guidelines to link the interest rate to external benchmarks will be issued by the end of December 2018.

Expert Committee on MSMEs

An Expert Committee will be constituted by the Reserve Bank to identify causes and propose long-term solutions for the economic and financial sustainability of the Micro, Small and Medium Enterprises (MSME) sector.

The composition of the Committee and its Terms of Reference will be finalised by the end of December 2018 and the report will be submitted by Committee by the end of June 2019.

MSMEs contribute significantly to employment, entrepreneurship and growth in the economy. However, they remain vulnerable to structural and cyclical shocks. It is important to understand the economic forces and transactions costs affecting the performance of the MSMEs.

Rationalisation of Borrowing and Lending Regulations under FEMA, 1999

As part of the ongoing efforts at rationalising multiple regulations under FEMA, 1999, the RBI proposed to consolidate the regulations governing all types of borrowing and lending transactions between a person resident in India and a person resident outside India in both foreign currency and INR.

The proposed regulations ‘Foreign Exchange Management (Borrowing or Lending) Regulations, 2018’ will rationalise the existing framework for external commercial borrowings and Rupee denominated bonds to improve the ease of doing business.

The consolidated regulation and guidelines will be issued by the end of December 2018.

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