RBI bi-monthly Monetary Policy takeaways
A RBI Policy meet took place on 7th February 2019, in which six-member Monetary Policy Committee (MPC), headed by RBI Governor Shaktikanta Das reviewed the macroeconomic and financial conditions.
What impact is this policy meet going to have? What stands are taken by the RBI? How important are these stands after the budget?
Following were the highlights of these policy meets: –
1. Repo Rate Cut :
Repo Rate forms a part of the liquidity adjustment facility. The rate at which the RBI lends money to commercial banks is called repo rate. It is an instrument of monetary policy. A reduction in the repo rate helps banks get money at a cheaper rate and vice versa.
RBI has cut repo rates by 0.25% from 6.5% to 6.25%. RBI has stood up to the expectations of the government.
Normally, everyone agrees unanimously for a decision to be taken on certain topics. But this time voting took place and a vote count of 4:2 resulted in the decision being made in the favour of cutting the repo rate. Mr. Viral Acharya and Mr. Chetan Ghate, 2 panel members who voted for the repo rate to be not cut in this policy meet. But 4 panel members, including Mr. Shaktikanta Das who us current RBI Governor, voted for repo rate to be cut.
2.Reverse Repo Rate :
Reverse Repo Rate is the rate at which the RBI borrows money from commercial banks. Banks are always happy to lend money to the RBI since their money is in safe hands with a good interest.
It is known as the rate at which banks lend money to RBI, when the banks have surplus. Reverse repo rate is always 0.25% less than the Repo rate. Thus, now the reverse repo rate has automatically become 6%.
3.Calibrated Tightening Stand :
In the last RBI policy meet, RBI had taken a stand of calibrated tightening.
Calibrated stand means that the RBI will either maintain the repo rate or hike it but will not decrease the interest rates.
Now, the stand has been changed and Neutral Stand has been taken. Neutral stand means having the full flexibility to increase, decrease or maintain the repo rate. Everyone (all 6 panel members) agreed for this neutral stand.
(The third stand is the Dovish stand , the exact opposite of calibrated stand where in repo rates can be reduced)
In the last policy meet, RBI said that the Consumer Price Inflation (CPI) will remain between 2.7% to 3.2%. But as per the current analysis done by them, RBI says that inflation will be of 2.4%. There is a drastic fall in the inflation expectations.
In the last policy meet, RBI forecasted the inflation in April-September 2019 quarter to be 4%. Not RBI has reduced the forecast to 3.2 to 3.4%.
If they are reducing the inflation by 0.6%, then it clearly states that this not the first rate cut. There will be rate cuts in the future too. So, if you are a debt-fund investor then this good news for you.
RBI hasn’t said it, but the numbers and forecast and also the expectation built clearly indicate that they will (are) take dovish stand. In the nest policy meets, there are very high chances of rate cuts.
“The headline inflation is projected to remain soft in the near term, reflecting the current low level of inflation and benign food inflation outlook “ – RBI
The projected GDP will be of 7.4% in 2019-2020. 7.2-7.4% in H1 and 7.5% in Q3 – with the risks evenly balanced. They come down from 7.5% to 7.4%, but nothing more as GDP number revisions keep happening.
6.Agricultural Loans :
This is another positive factor where the RBI has tried to make the government happy. Here, RBI and the government are in complete synch.
Agricultural loans up to Rs. 1 lakh didn’t require any collateral. This limit is now increased by Rs 60,000. That is now agricultural loans up to Rs. 1.6 lakh won’t require any collateral.
This can also be positive in the short term.
- The repo rate cut and neutral stand are very good signs for the industry and also a relief for the government.
- The main thing to take from today’s RBI policy meet is the inflation target set by the RBI and the rate cuts it is indicating.
- RBI and the government now seem to be on the same side to boost the economy by taking short term measures, rate cuts will be done. In the coming 9 months, repo rates may come down to even 5.5% to 5.75%.
- The rate cut forecasts are just a prediction We are not making any final statements.
- We are also not being pro/anti-RBI/government.