The Reserve Bank of India (RBI) on October 5, 2018 released its Fourth 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. Five of the six panel members voted to leave the rate unchanged.
Considering the current market situation, it was expected that the RBI would hike the policy rate to combat inflationary pressures arising from high oil prices and a weakening value of rupee. However, the MPC shifted its policy stance to ‘calibrated tightening” from ‘neutral’.
Post the RBI policy announcement, rupee hit a fresh low beyond Rs 74 a dollar, down 0.62 percent from its previous close.
Key highlights of Fourth Bi-monthly Monetary Policy Statement 2018-19
• CPI inflation is projected at 4.0 percent in Q2, 3.9-4.5 percent in second half (H2) and 4.8 percent in Q1 of the Financial Year 2019-20.
• On the growth front, though RBI has retained the real GDP growth projection at 7.4 percent for Financial Year 2018-19, it revised the Q2 projection for FY19 downward by 10 bps to 7.4 percent due to the expected diminishing investment activity. The bank projected the GDP of Q4 at 7.1 percent.
• On the developmental and regulatory front, the RBI proposed an easier investment route namely, Voluntary Retention Route (VRR) for FIIs who want to invest in long-term funds in the Indian debt market.
• The RBI also proposed to introduce a regulatory framework for financial benchmarks which shall apply to benchmarks issued by the Financial Benchmarks of India (FBIL).
• Private consumption remained robust and is likely to be sustained despite the fact that the recent rise in oil prices may impact disposable incomes.
• Both global and domestic financial conditions have tightened, which may dampen investment activity.
• Rising crude oil prices and other input costs may also drag down investment activity by hollowing profit margins of corporates.
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