RBI policy: 5 takeaways from monetary policy committee meet

After two successive rate hikes, the Reserve Bank of India kept key policy rates unchanged for the second time at its fifth bi-monthly monetary policy review in the year, on Wednesday.

Here are 5 key takeaways from the MPC report:

• A 'dovish' pause: The MPC kept the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.5 per cent. Consequently, the reverse repo rate under the LAF remains at 6.25 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 6.75 percent. Now that the rates have been kept on hold, this means it would be non event for the investors who rely on fixed income investments, especially bank fixed deposits (FDs). As the central bank has kept rates unchanged, this means there would no issue of liquidity in the system. At the same time, most of banks have revised the interest rates on FDs recently for select tenures, so the interest on FDs is likely to remain same in the near future.

• Cut SLR by 25 bps: The Reserve Bank slashed statutory liquidity ratio (SLR) by 25 basis points to 19.25 per cent from January 1, 2019, adding that it would be reduced by 25 basis points every quarter until it reaches the 18 per cent level. SLR indicates the minimum percentage of deposits that the bank has to maintain in form of gold, cash or other approved securities before providing credit to the customers. This is determined by Reserve Bank of India maintained by banks in order to control the expansion of bank credit. The RBI has reduced the level of SLR to boost liquidity with the commercial banks, which would fuel growth and demand in the economy. This would also encourage banks to invest in riskier appetite such as stock market, not in safe heaven assets such as government securities or gold.

• Lower inflation projection for H2: The MPC lowered expected inflation in the range of 2.7-3.2 per cent for the second half of the current fiscal against its previous projected retail inflation to be around 3.9-4.5 per cent in the October-March period of 2018-19, citing softening of food inflation and collapse in oil prices. The RBI said that the benign outlook for headline inflation is driven mainly by the unexpected softening of food inflation and collapse in oil prices in a relatively short period of time. Excluding food items, inflation has remained sticky and elevated, and the output gap remains virtually closed.

• Retains GDP forecast at 7.4% for FY19: The MPC has retained its GDP forecast for the current fiscal at 7.4 per cent and said growth will accelerate further to 7.5 per cent in first half of 2019-20, amid surge in investment activity. This indicates that domestic macroeconomic fundamentals have strengthened and there has been acceleration in investment activity which bodes well for the medium-term growth potential of the economy.

• Global headwind to continue: According to RBI, global economic activity has shown increasing signs of weakness on rising trade tensions. Global financial markets have been driven mainly by rising policy rates in the US, volatile crude oil prices and expectations of a slowdown compared with earlier projections. Among advanced economies (AEs), economic activity appears to be slowing in the US in fourth quarter of 2018, after a buoyant third quarter. The Euro area growth lost pace in Q3, impacted by weaker trade growth and new vehicle emission standards. The Japanese economy contracted in Q3 on subdued external and domestic demand.

Edited by Chitranjan Kumar