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April 06, 2017

A glide path for CPI target brings clarity

The Monetary Policy Committee (MPC), during its review meeting on Thursday, April 6, 2017, left the policy repo rate unchanged at 6.25%, and retained its ‘neutral’ monetary policy stance. All six members of the committee voted to stay put. In order to also make the Reserve Bank of India’s (RBI) liquidity stance consistent with its monetary stance, the policy rate corridor was narrowed from 50 basis points (bps) to 25 bps, bringing the reverse repo rate to 6% and the marginal standing facility (MSF) rate to 6.5%. This will now help to mop up liquidity and correct the recent steep fall in money market rates at the short end, by steering them closer to the repo rate.
 

On inflation, the MPC reaffirmed its consumer price index (CPI)-based inflation target of 4% for the medium term. But now, it has telegraphed a glide path that takes CPI inflation to an average of 5% in the second half of fiscal 2018, and 4.6% in the fourth quarter of fiscal 2019. These can be seen as interim targets in the journey towards 4%. Had the goal of achieving 4% inflation target been advanced, it would have warranted strong disinflationary bias in the monetary policy. This has now been avoided.