Decision/ Observation

  1. Kept Policy rates unchanged to previous level
    1. Repo rate = 6.5%
    2. Reverse Repo rate = 6.25%
    3. MSF rate = Bank Rate = 6.75%
  • LAF corridor = 0.25%
  • Policy Rate Corridor = 0.5%
  1. Stance -> Calibrated Tightening.
  2. GDP growth projection retained at 7.4% as was on August (3rd) Monetary Policy.
  3. Lowered inflation projection for rest of the year as well as for Q1FY20.
  4. View on investment Cycle -> Expected to increase because
    1. Improvement in Capacity utilization
    2. Increase in FDI inflows
    3. Increased financial resources to the corporate sector. (IBC is one of the reason)

Rational:

Liquidity Crunch: Money/debt market crises due to IL&FSs default on debt caused this. To ease out this liquidity crunch RBI has initiated liquidity easing measures like aggressive Open Market purchase of bonds. Through rate cut RBI tried to ease out the liquidity crisis.

Comfort on inflation: Good Agriculture output eased the inflation. Further customs duty cut on crude oil and taxes cut on petroleum products by some states also provided some comfort to RBI on the inflation front.

 

Criticism:

Falling Rupee value:  Rupee is already on its historical low value because of numerous reasons. One among them is reviving USA economy (Indicating by USA’s GDP and Job numbers). Had the RBI increase the policy rate, it would attract the international investor to invest in India. This would increase the dollar inflow in India. This could have improved the value of Rupee.

Risk:

  1. Tighten global and domestic financial conditions -> could lead to less international investment -> less inflow of dollar -> Rupee depreciate
  2. Rising crude oil prices -> higher fuel cost -> inflation increase
  3. Depreciation of the rupee -> Costly import -> inflation increase
  4. Slowing down of global trade and the escalating tariff war -> Less export

However, Depreciation of rupee can push the export and counter the effects of slowing down of global trade to some extent.