RBI's MONETARY AND FISCAL POLICY

RBI Monetary Policy June 2019 Main Highlights

Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) in its June 2019 meeting cut interest rates by 25 basis points, as was widely expected, for the third consecutive time.

At the end of a three-day MPC meeting, RBI Governor Shaktikanta Das announced its second bi-monthly monetary policy statement for 2019-20. All members of the MPC (Dr. Chetan Ghate, Dr. Pami Dua, Dr. Ravindra H. Dholakia, Dr. Michael Debabrata Patra, Dr. Viral V. Acharya and Shaktikanta Das) unanimously decided to reduce the policy repo rate by 25 basis and change the stance of monetary policy from neutral to accommodative.

Amid slowing economic growth and rising global uncertainty, the RBI had decreased the short-term lending rate (repo rate) by 25 basis points each in its last two policy reviews. The marginal standing facility (MSF) rate and the Bank Rate stands adjusted to 6%.

Other Highlights From RBI’s Monetary Policy - June 2019

  • Cuts GDP growth forecast to 7 per cent from 7.2 per cent for FY20.
  • MPC raises retail inflation forecast for April-September to 3-3.1 per cent and 3.4-3.7 per cent in October-March.
  • RBI MPC projects upward bias in food inflation in near term due to rising prices of food items.
  • Forecast risks to inflation trajectory from monsoon uncertainties, unseasonal spike in vegetable prices, crude oil prices, financial market volatility and fiscal scenario.
  • Waives RTGS and NEFT charges to promote digital transactions.
  • RBI sets up a panel to review ATM charges, fees levied by banks.
  • RBI to issue draft guidelines for ‘on tap’ licensing of small finance banks by August.
  • Flags sharp slowdown in investments, moderation in private consumption growth as concern.
  • RBI said there is a case for more players in the Small Finance Bank sector. RBI will issue draft guidelines for ‘on tap’ licensing of small finance banks by the end of August 2019.
  • On transmission of rate cuts, RBI noted that the transmission of cumulative reduction of 50 bps in the policy repo rate in February and April this year was 21 bps to the weighted average lending rate (WALR) on fresh rupee loans.
  • To promote digital transactions, RBI has decided to waive off RTGS and NEFT charges.
  • RBI has revised consumer price inflation forecast for the first half of fiscal year 201920 to 33.1% from 2.93% earlier, while the projection for the second half stands revised to 3.43.7% from 3.53.8% earlier.
  • The MPC revised both its growth and inflation forecasts for the current fiscal. GDP growth has been revised downwards to 7% from the earlier projection of 7.2%. The MPC expects growth in in the range of 6.46.7% in the first half of FY20 and 7.27.5% in the second half.
  • RBI said these decisions are in consonance with the objective of achieving the medium term target for consumer price index (CPI) inflation of 4 per cent within a band of +/ 2 per cent, while supporting growth.

Expert Assessments From RBI’s Monetary Policy - June 2019

  • RBI Governor Shaktikanta Das said they will ensure that adequate liquidity is there in the system.
  • Risks around the baseline inflation trajectory emanate from uncertainties relating to the monsoon, unseasonal spikes in vegetable prices, international fuel prices and their passthrough to domestic prices, geopolitical tensions, financial market volatility and the fiscal scenario, RBI said.
  • Inflation expectations of households in the May 2019 round of Reserve Bank’s survey declined by 20 basis points for the three month ahead horizon compared with the previous round, but remained unchanged for the one year ahead horizon.
  • Sovereign bonds rallied in India, sending benchmark yields to their lowest since November 2017, after the central bank cut its key rate and left the door open for more policy easing to shore up a sagging economy. The rupee held losses, while stocks extended declines.
  • Home and car buyers would be hoping for cheaper loans from banks after the Reserve Bank of India today cut key policy rates for the third time in a row.
  • A reduction in policy rates will come with a reduction in market yields even if the transmission to the real economy via lower lending rates from the banking system may take some time.
  • A reduction in interest rates will affect different types of debt funds differently depending upon their portfolio. Not all debt funds react similarly to a fall in market yields.
  • The RBI rate cut is expected to bring down EMIs on home and auto loans, and reduce the debt repayment burden on corporates. In all, the central bank has reduced the benchmark lending rate by 0.75 percentage point since February this year.
  • Average daily surplus liquidity in the system at Rs.66,000 crore in early June.
  • Foreign Exchange Reserves stood at USD 421.9 billion on May 31, 2019.

Source: RBI

Last Updated: June 2019

Next Update: Based on RBI Policy Updates

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