As widely expected, the Reserve Bank of India’s (RBI’s) Monetary Policy Committee (MPC) decided to keep policy rates on hold. Repo rate, therefore, stays at 6.50%, and the reverse repo and marginal standing facility (MSF) rates at 6.25% and 6.75%, respectively. The MPC also continued with its policy stance of calibrated tightening. All the six members of the MPC supported the decision to keep rates on hold. However, one of six members voted in favour of change in the stance back to neutral in view of inflation undershooting.
The decision to hold the rate was based on the following factors: i) A slower-than-expected inflation print in the last few months and abatement in some of the upside risks to the future inflation path, and ii) to support liquidity in the system, which has come under pressure recently, and to address downside risks to growth
Inflation based on the consumer price index (CPI) has remained below the RBI’s medium-term target of 4% in the last three months, reaching a 13-month low of 3.31% in October 2018. This is largely attributed to food inflation, which has been unusually subdued in the past few months, with a negative print (-0.8%) in October. Mandi prices of many commodities languishing below their minimum support prices (MSPs) and a healthy food output have pushed food inflation lower. On its part, fuel inflation is expected to be assuaged by a reduction in global crude oil prices and excise cut on petrol and diesel. Taking cognizance of these developments, RBI had reduced its inflation forecast for H2 2018-19 to 2.7-3.2%, from 3.9-4.5% earlier. It, however, continued to cite several upside risks to inflation such as impact of MSPs going ahead, uncertainty on crude oil prices basis geo-political tensions, any fiscal slippage at centre/state level, staggered impact of state level HRA revision etc.
Liquidity in the NBFC space and systemic liquidity in the banking system have come under deficit in the past few months. The RBI has been trying to address both. The central bank has reduced the minimum holding period requirement for NBFCs raising funds via securitisation of loans of original maturity above 5 years. To support liquidity in the banking system, the RBI has jacked up open market operations (OMO). It conducted OMOs worth Rs.360 billion in October and Rs.500 billion in November. And injected Rs 560 billion and Rs.806 billion of liquidity under LAF in October and November respectively. To improve the assessment of liquidity requirements by banks, RBI will provide information on daily CRR balance of the banking system to market participants on the very next day as opposed to a lag of 2-3 days so far.
Despite undershooting of inflation, RBI cited upside risks to inflation and continued with its monetary policy stance of calibrated tightening, which, in the current context, should be interpreted as a pause. The MPC wants to monitor the evolving situation before deciding to revisit its current stance.