• CRISIL Monetary Policy Review
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October 05, 2018

On hold for now, but stance tilts towards tightening

  • The Reserve Bank of India’s (RBI’s) Monetary Policy Committee (MPC) decided to keep policy rates on hold, contrary to the consensus view in the market. Repo rate, therefore, stays at 6.50%. Accordingly, the reverse repo and marginal standing facility (MSF) rates are 6.25% and 6.75%, respectively. The MPC also changed its policy stance from neutral to calibrated tightening. Five of the six members of the MPC supported the decision to keep rates on hold, whereas one member voted for a 25 basis points (bps) rise. Likewise, five of six members voted in favour of change in stance.
  • The decision to hold the rate was based on the following factors: i) to observe the evolving situation on inflation front (the recent inflation prints were lower than the projections on account of sharp slowdown in food inflation and accordingly, there has been a downward revision to the future inflation trajectory compared with August 1 projections) and ii) to support liquidity in the system which has come under pressure recently
    • With food inflation slowing down sharply in the previous two months, CPI inflation has fallen below the RBI’s medium-term target of 4.0%. In August, CPI inflation measured 3.7%. Despite patchy southwest monsoons, kharif production in most crops has been adequate and the mandi prices continue to trail MSP. The efficacy of the government’s procurement, and hence the inflationary impact of higher MSPs, is yet to pan out. That said, RBI did point out to several upside risks such as high crude oil prices, depreciating rupee, Pay Commission hikes at the state level and volatility in international financial and currency markets.
    • Liquidity in the system again moved into deficit during September 11-29 on the back of an increase in government cash balances and the RBI’s forex interventions. To support liquidity, RBI conducted OMOs worth Rs 200 billion and injected Rs 406 billion through the liquidity adjustment facility (LAF) in September. It also allowed banks to have a higher carve out from the statutory liquidity ratio (SLR) to support liquidity in the banking system.
    • In view of the ensuing risks to inflation in the future and in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, the MPC changed its monetary policy stance from neutral to calibrated tightening, which means one can’t expect a rate cut in the in the ongoing rate cycle.