• CRISIL Monetary Policy Review
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February 07, 2020

Pause for now

Monetary Policy Review

Exercising restraint


  • Status quo for now, but room for further policy easing indicated
  • Concrete steps such as long-term repo operation for improving monetary transmission, complemented by encouraging flow of bank credit to key productive sectors, especially micro, small and medium enterprises (MSMEs)
  • CRISIL expects 6% growth and 4% inflation in fiscal 2021


  • The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), in its sixth bi-monthly monetary policy review for fiscal 2020 today, opted to keep policy rates on hold. This is the second consecutive meeting the MPC has opted for a status quo, after five consecutive cuts last calendar. Hence, the repo rate remains unchanged at 5.15%, and the reverse repo and marginal standing facility rates at 4.90% and 5.40%, respectively. The decision to hold the policy rate was unanimous. The MPC also decided to continue with the accommodative stance.
  • The decision not to cut the policy rate was guided by the current high inflationary environment, some nascent signs of mild growth recovery, and continued focus on improving monetary transmission.

    Inflation remains near-term worry: Inflation based on the consumer price index (CPI) has trended up and reached 7.4% in December 2019 – the highest since July 2014 – largely due to double-digit food inflation. At the same time, fuel inflation has moved out of deflation. While prices of onions, the key contributor to high food inflation, have seen some easing, prices of some other food categories such as milk and pulses have been firming up. According to the MPC, “the recent pick-up in prices of non-vegetable food items, specifically in milk due to a rise in input costs, and in pulses due to a shortfall in kharif production, are all likely to sustain.” It accordingly expects inflation to come down only gradually. With the assumption of a normal monsoon, the MPC projects inflation at 6.5% for Q4, fiscal 2020, 5-5.4% for H1 fiscal 2021, and 3.2% for Q3 fiscal 2021.

    Mild recovery in growth: The MPC acknowledged the mild positive drift in some high-frequency indicators. Citing mixed signals, the MPC noted that while sales growth of tractors turned positive in December, those of motorcycles and passenger vehicles continued to contract. On the other hand, domestic air passenger traffic grew at a healthy pace in the last two months. The MPC projects GDP to grow 6% in fiscal 2021, in the range of 5.5-6% in H1, and at 6.2% in Q3. CRISIL’s forecast of real GDP growth in fiscal 2021 is also at 6%.

    Transmission to lending rates and encouraging banks to dispense credit: The RBI adopted a new liquidity framework that promises better liquidity management. The new framework is doing away with targeted provisions linked to net demand and time liabilities (NDTL), which means “the Reserve Bank will ensure adequate provision/absorption of liquidity as warranted by underlying and evolving market conditions – unrestricted by quantitative ceilings – at or around the policy rate”. It also announced term repos of one-year and three-year tenures worth up to Rs 1 lakh crore, aimed at providing durable liquidity at a reasonable cost to banks. It provided provision for banks to reduce their cash reserve ratio (CRR) requirement in lieu of the retail credit extended for automobiles, residential housing and MSMEs till the fortnight ending July 31, 2020. Loans to micro and small enterprises were already linked to external benchmarking, and this has now been extended to medium enterprises as well.