• CRISIL Monetary Policy Review
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June 06, 2019

The growth pitch

Monetary Policy Review

Repo sliced, stance changes to accommodative


  • The Reserve Bank of India (RBI)’s Monetary Policy Committee (MPC), in its second bi-monthly Monetary Policy Review for fiscal 2020 today, cut the policy rate by 25 basis points (bps), following two similar cuts in the previous two policies. Consequently, the repo rate now stands at 5.75% (lowest since September 2010), and the reverse repo and marginal standing facility (MSF) rates at 5.50% and 6.00%, respectively. The MPC also changed its policy stance to accommodative from neutral. The moves were unanimous, with all six MPC members voting for the rate cut and the change in policy stance.
  • Today’s policy decision was based on the following factors:
    i) Benign inflation scenario, especially the core; ii) Sharp slowdown in domestic growth, amid global headwinds stemming from subdued global growth and escalating trade tensions
    • Inflation based on the consumer price index (CPI) remains well below the RBI’s medium term target of 4%, with the latest print, for April, at 2.92%. The MPC believes headline inflation will remain under 4% this fiscal and has projected CPI inflation at 3.0-3.1% for H1 and 3.4-3.7% for H2, with risks broadly balanced. Not only has core inflation (taking out food and fuel) moderated sharply, but also inflation expectations of the households have continued to moderate, the committee has noted. While it has acknowledged the volatility in crude oil prices, the MPC believes its impact on headline inflation is muted. CRISIL forecasts CPI inflation for fiscal 2020 at 4%.
    • The Central Statistics Office (CSO) recently revised its GDP growth estimate for fiscal 2019 downwards by 20 bps to 6.8%, the slowest pace of growth since fiscal 2014. The MPC has noted that “weak global demand due to escalation in trade wars may further impact India’s exports and investment activity. Further, private consumption, especially in rural areas, has weakened in recent months.” It has accordingly revised down its GDP growth projection for fiscal 2020 to 7.0% from 7.2% earlier. Given the Indian Metrological Department’s prediction of well-distributed and near normal monsoon (96% of long period average) last week and expectation of lagged impact of rate cuts filtering in going ahead, we believe GDP growth will cross 7.0% in fiscal 2020. Our current growth forecast of 7.3% is under revision.