RBI's Sixth Bi-Monthly Monetary Policy Review

Introduction:

The sixth bi- monthly policy resolution by the Monetary Policy Committee, RBI has decided to:
 Keep the REPO rate (Repurchase Agreement, the rate at which RBI lends to commercial banks) unchanged at 6.25 %, Reverse REPO (rate at which commercial banks park their funds with RBI) at 5.75 %, Marginal Standing Facility (MSF, the rate at which short term credit requirements of the commercial banks are satisfied via buying and selling of approved government securities) at 6.75 %. The decision of the MPC to keep the key rates unchanged was to keep up with the objective of containing CPI (Consumer Price Index) inflation at 5 % while maintaining growth and developmental aspirations.


Reasons for the Unchanged Monetary Policy stance:

  • Modest rates of economic growth in Advanced Nations, modest growth rates clouded by recessionary pressures in emerging economies along with the uncertainty that surrounds the US macroeconomic policies as well as the protectionist sentiments aired by the new administration has its due bearing on the unchanged monetary policy status.
  • High volatility associated with international financial markets, concerns and apprehensions associated with the Brexit, hardening of crude oil prices on the back of reduced production by OPEC (Organization of Petroleum Exporting Countries), firming up of commodity prices as well as expectations with regard to fiscal expansion in US as such contributed to the scaling up of US Dollar, perpetuating the neutral monetary policy stance.
  • Though agricultural sector and core industries has registered quite an impressive growth performance, manufacturing and service sector has lost its pace of accentuated activity, along with worsening financing conditions and investment sentiments, scaling down the prospects for Industrial activity.
  • Though retail inflation has decreased sharply on the back of a reduction in prices of vegetables, pulses, eggs, meat and fish, inflation excluding food and fuel remains at 4.9 % level, which attributes much to the scaling up of crude oil prices.
  • Money market, though experienced a bit of shake up, consequent of demonetization necessitating RBI intervention in the form of liquidity absorption, it is in a turnaround mode via expansion of currency in circulation and issue of new bank notes. While exports registered positive dimensions, imports came down excluding petroleum, oil and lubricants. Trade deficit also scaled down and it is expected that Current Account Deficit is expected to be below 1 % of GDP in 2016-17. FDI has been buoyant though there is an increase in portfolio outflows which owes much to uncertainty associated with US macroeconomic policy.

Outlook and future prospects for the economy:

Though the projected rate of head line inflation for the fourth quarter of 2016-17 was 5%, economy has experienced a decline in the same on the back of lowering of prices of vegetables, pulses etc. and it is anticipated that once the effects of demonetization wears off prices might rebound. Nevertheless it is expected that headline inflation might stay within the band of 4-5 % in the 2017 -18 fiscal. However the volatility associated with crude oil prices, exchange rates as well as effects of house rent allowances based on the recommendations of Seventh Pay Commission might act as a potential game changer with regard to futuristic inflation trends. It is also expected that as the shocks of demonetization wears off, consumer demand, growth of cash incentive sectors such as retail trade, unorganized sector etc. might pick up. Similarly reduction in Marginal Cost based Lending Rate (MCLR- interest rate that reflects cost conditions of commercial banks with regard to obtaining funds from the market or RBI for lending purposes) is expected to accentuate investment and consumer demand along with budgeted infrastructural development in rural areas, as well as Capital expenditures, spiking up the projected rate of Gross Value Added for the economy from 6.9 % for 2016-17 to 7.4 % in 2017-18 highlighting a paradigm shift in monetary policy stance from being accommodative to neutral.
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