RBI Monetary Policy: RBI cuts Repo Rate by 25 bps, cuts GDP Growth rate, revises inflation target upwards

The Reserve Bank of India (RBI) on June 6, 2019 released the Second Bi-monthly Monetary Policy Statement 2019-20 after assessing the current and evolving macroeconomic situation in the economy. In its bi-monthly policy, the six members Monetary Policy Committee (MPC), led by RBI Governor Shaktikanta Das, decided to:

• Reduce the policy Repo Rate under the Liquidity Adjustment Facility (LAF) to 5.75 percent from 6 percent

• The Reverse Repo Rate under the LAF stands adjusted to 5.50 percent

• The Marginal Standing Facility (MSF) rate and the Bank Rate stand at 6 percent

• The monetary policy stance changed from neutral to accommodative.

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.

Note: This was third rate cut in a row by the central bank.

Other decisions of the Monetary Policy Committee:

• RBI revises GDP growth for year 2020 downwards to 7 percent from 7.2 percent projected earlier

• The Bank expects GDP growth of 6.4-6.7 percent in the first half of FY20 and 7.2-7.5 percent in the second half of the fiscal year

• The CPI Inflation forecast for first half of the FY20 has been revised upwards to 3-3.1 percent and to 3.4-3.7 percent for the second half of FY20

• Minimum Liquidity Ratio for Domestic Systemically Important Banks (DSIBs) to be 4 percent. For other banks, Minimum Liquidity Ratio shall be 3.5 percent

• RBI to consider ‘on tap’ licensing of Small Finance Banks

• A ‘Working Group’ will be set up to review regulatory guidelines for currency in circulation (CICs)

• An ‘Internal Working Group’ will be constituted to review liquidity management framework

What is Repo Rate?
Repo rate is the rate at which all the banks borrow funds from the Reserve Bank of India.

What is Reverse Repo Rate?
Reverse Repo Rate is the rate at which banks park their funds with the RBI.