RBI Monetary Policy Highlights Dec 2019

RBI Decided to Keep Repo Rate Unchanged to 5.15% (5th December, 2019)

Introduction

Reserve Bank of India (RBI) in its fifth Bi-monthly monetary policy meet of FY2019-20, decided to keep repo rate unchanged to 5.15% on 5th December 2019. Also, RBI decided to continue with the Accommodative stance of monetary policy and also lowered GDP growth projections to 5% from 6.1% for FY2019-20. Lets discuss the key highlights of monetary policy in detail.

RBI Monetary Policy Highlights Dec 2019 – Repo Rate Kept Unchanged

• On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its 5th Bi-monthly meeting on 5th December, 2019 decided to keep the policy repo rate unchanged at 5.15%.
• The MPC also decided to continue with the Accommodative stance of monetary policy as long as it is necessary for reviving growth.
• These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth.

1. RBI decided to keep Repo Rate unchanged at 5.15%

• On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its 5th Bi-monthly meeting on 5th December, 2019 decided to keep the policy repo rate unchanged at 5.15%.
• Consequently, the reverse repo rate remains unchanged at 4.90% and the Bank Rate at 5.40%.
• In 2019, the RBI has cut repo rate by 135 basis points so far to a nine-year low of 5.15%. Analysts were expecting another 25 basis points cut. However, Monetary Policy Committee surprised, shocked even, many observers of the Indian economy by announcing that it would not cut the repo rate as it announced its Dec-19 monetary policy review.

2. RBI to Continue with the Accomodative Stance

• RBI has decided to continue with the Accomodative stance of monetary policy as long as it is necessary to revive growth.
• It is prudent to remain accomodative as stated by MPC. In the second bi-monthly policy review of FY20 held in June 2019, MPC had changed the monetary policy stance from neutral to accomodative.
• A significant weakening of growth impulse, slowdown in investment activity and a continuous moderation in private consumption growth is a matter of concern, as noted by MPC.
• On account of the slowdown in the above mentioned macroeconomic indicators, RBI sees scope to accommodate growth by supporting efforts to boost demand and re-energize the private investment activity.

3. Revision in GDP Projections to 5% from 6.1% for FY2019-20

• GDP growth for 2019-20 is revised downwards from 6.1% in the Dec policy to 5% on account of weakening of both domestic and external demand conditions.
• In the last MPC meet (Oct-19), GDP growth was revised to 5.3% in Q2: FY2019-20. However, the actual GDP growth for Q2: FY2019-20 slumped to 4.5%, the lowest in more than 6 years and it is significantly lower than projected number (5.3%).
  • It is due to significantly lower than expected GDP number in September quarter ie. 4.5% from 5% in June quarter.
  • Various high frequency indicators suggest that domestic and external demand conditions have remained weak. The business expectations index of the Reserve Bank’s industrial outlook survey indicates a marginal pickup in Q4.
• GDP growth projections are in the range of 4.9-5.5% for H2: FY2019-20, with risks evenly balanced.
• While, GDP growth for H1: FY2020-21 is also revised downwards to 5.9-6.3%.
• The GDP projections for H2: FY2019-20 and H1: FY2020-21 are made on the following positive outlooks.
• The impact of monetary policy easing since February 2019 is gradually expected to feed into the real economy and boost demand.
• Several measures announced by the Government to boost growth :
  • Corporate Tax Rate Cut
  • Withdrawal of Higher Surcharge on sale of Equity by FPIs as well as domestic investors
  • No Tax on Buyback of shares announced prior to 5th July, 2019
• The above measures are expected to revive sentiment and spur domestic demand, especially private consumption in coming quarters.

4. Revision in CPI Inflation

• RBI has revised Consumer Price Index (CPI) inflation upwards :
• H2: FY2019-20 in the range 4.7-5.1%
• H1: FY2020-21 at 3.8-4%, with risks evenly balanced.
• Following are the key driving factors which are taken into consideration by MPC for the revision in CPI forecast :
  1. Rise in food inflation on account of upsurge in prices of vegetables and incipient price pressure in other food items like milk, pulses, sugar.
  2. Volatile Crude-oil prices due to Geo-political tensions
  3. Near-term Price pressures due to volatile currency

5. Transmission Process

• The success of the accommodative policy would depend entirely on the transmission of the lower rates to the ultimate borrowers. Thus the key determining factor of expected favourable results of earlier 135 points repo rate cut by RBI is the effective cascading of the benefits of lower base rate by the banks. 
• In simple words, when RBI cuts repo rate, banks should immediately cut the interest rates of the loans. Interest rates of home loans, vehicle loan or business loans should be come down hand-in-hand.
• RBI is focusing on quick transmission of lower interest rates to the borrowers, issuing loans from the banks. RBI has already made it mandatory for the banks to link the interest rates on loans to the repo rate.

6. RBI raised Exposure Limit of NBFC-P2P Platform & removed Escrow Account requirement

• On Peer to Peer (P2P) Lending Platform, RBI :
  • Raised the aggregate exposure limit to Rs.50 Lakh from earlier Rs.10 Lakh
  • Proposed to do away the current requirement of escrow account to be operated by bank promoter trustee for the transfer of funds across P2P platform
• Consequences of increase in aggregate exposure limit to Rs. 50 Lakh in P2P lending platform :
  • The existing High Net Worth (HNI) investors on P2P platform can scale up their investments
  • More HNIs would look at peer-to-peer lending as an investment option, which is a very positive sign for the industry
  • The increased limit will ease credit supply benefiting MSMEs
  • Due to removal of escrow account requirement in P2P lending platform, it will provide more flexibility in operations