Monetary Policy Committee Review conducted by RBI on 6 June 2019 is the first monetary policy review in second term of NDA government. Previously MPC review was done on 4 April 2019.
Key highlights of Monetary Policy Review
Change in key rates
- Repo rate: 5.75% (-0.25%)
- Reverse repo rate: 5.50% (0.25%)
- Bank Rate and MSF: 6% (-0.25%)
Learn: What are Repo rate, Reverse repo rate and Bank rate
Other important features in MPC review
- Relaxation of regulatory requirement on commercial banks lending, through relaxed leverage ratio.
- Leverage ratio for systematically important banks: 4% (-0.5%)
- Leverage ratio for other banks: 3.5%
- Removal of transaction charges on NEFT/RTGS
- Policy stands changed from Neutral to accommodative
- GDP growth rate is revised to 7% (-0.2% from earlier projection)
- Setting up a committee under Indian Banks’ Association(IBA) to examine the entire gamut of ATM charges and fees
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Key challenges for RBI currently
India is facing lowest unemployment rate in 45 years. Industry growth has slowed down, and GDP rate is also falling. Industrial output has fallen to its 20 months with manufacturing struggling the most.
Key economics metrics of India
India is performing poorly currently on various economics metrics.
- Unemployment rate:
- 1% (Periodic Labour Force Survey by GOI, 2017-18)
- 17% (Centre for Monitoring the Indian Economy (CMIE), 2019)
- GDP rate: 6.8% (2018-19)
- IIP: 0.1% (CSO, Feb 2019). Lowest in 20 months.
- Inflation: CPI 3.1% (RBI)
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RBI current rate changes were driven by slowing domestic economy, widening of the output gap and global projection of slow manufacturing and trade activities.
Projected impact of current RBI policy
RBI expects to stimulate aggregate demand and increase private investment with this rate changes.
By cutting down on leverage ratio, banks can lend more on the same capital base. It is expected that lending will increase by 50,000-75,000 cr by this change.
With increase in money supply, there is a risk of inflation. RBI has revised its inflation projection for H2(2019-20) to 3.4-3.7% , which is under its benchmark figure of 4%. As per RBI, current CPI inflation is 3.1%. Thus RBI is increasingly looking at growth while still controlling the inflation mark.
The change in stance from neutral to accommodative is good news for debt market. There is lower possibility of sudden rate hike, and there is room for a 50-100 bps rate cut in the system. The change in stance to “accommodative” means there is a possibility of further monetary easing in the months ahead.
Conclusion
There has been positive review of the recent MPC review. RBI is now focusing overall economy metrics rather than sticking to its inflation benchmark of 4%. With infusion of more and cheaper credits, industry will see a boost which will help in tackling unemployment problem.
The main issue that remain unsolved in this MPC review is clarity over struggling NBFCs. There are also concerns over stogy transmission of rates especially by commercial banks.
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