RBI Monetary Policy Review

December 5th, 2019

Policy Action:
 RBI, in the Fifth Bi-monthly monetary policy of FY20 keep the policy repo rate under the Liquidity Adjustment Facility
(LAF) unchanged at 5.15%.
 Consequently, the reverse repo rate stands adjusted to 4.90%, and the Marginal Standing Facility (MSF) rate and the
Bank Rate to 5.40%.
 The MPC also decided to maintain the accommodative stance as long as it is necessary to revive growth, while ensuring
that inflation remains within the target.
 These decisions are in consonance with the objective of achieving the medium-term target for consumer price index
(CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.

As part of the Developmental and Regulatory Policies following decisions are of note:

(1) Attempts to reduce concentration risk in exposures of primary (urban) co-operative banks by amending the regulatory
guidelines relating to UCBs
(2) Facilitate the setting up of a self-regulatory body as a step towards the development of the secondary market for corporate
loans
(3) Easing operations for International Financial Service Centre Banking Unit (IBU) by allowing them to open foreign currency
current accounts of their corporate borrowers and to accept fixed deposits in foreign currency of tenor less than one year
from non-bank entities and consequently remove the current restriction on premature withdrawal of deposits.

Economy Assessment:

 The CPI inflation projection is revised upwards to 5.1% -4.7% for H2:2019-20 and 4.0% - 3.8% for H1:2020-21, with
risks broadly balanced.
 Real GDP growth for 2019-20 is revised downwards from 6.1% in the October policy to 5.0%, 4.9% - 5.5% in H2 and
5.9% - 6.3% for H1:2020-21. While improved monetary transmission and a quick resolution of global trade tensions
are possible upsides to growth projections, a delay in revival of domestic demand, a further slowdown in global
economic activity and geo-political tensions are downside risks.
 Real GDP growth was weighed down by a sharp slowdown in gross fixed capital formation (GFCF), cushioned by a
jump in government final consumption expenditure (GFCE).
 MPC 6 – 0 members voted for rate pause as they recognize that there is monetary policy space for future action.
However, given the evolving growth-inflation dynamics, the MPC felt it appropriate to take a pause at this juncture.
Accordingly, the MPC decided to keep the policy repo rate unchanged and continue with the accommodative stance
as long as it is necessary to revive growth, while ensuring that inflation remains within the target.
 After the introduction of the external benchmark system, most banks have linked their lending rates to the repo rate;
 RBI Monetary Policy Review

this will help in better transmission going forward.

 Overall liquidity in the system remained in surplus in October and November 2019 despite an expansion of currency
in circulation due to festival demand.

Market Movement

The market strength that was developed over the past week washed away post the policy announcement, which was delivered
against the market expectations (25bps rate cut). The 10Y benchmark witnessed an immediate uptick of 10bps and reached a three
month high of 6.59%. The money markets also saw yields moving up by 15-20bps post the policy

Outlook:

Contrary to the market expectations MPC kept key interest rate unchanged at 5.15% prioritizing rising inflation concerns in the
evolving growth inflation dynamics, clearly shifting focus to inflation while remaining accommodative and recognizing there is
monetary policy space for future action. However, high inflation is to remain a constraint and put pause to further rate cuts. All said
and done in the situation of the divergence between growth and inflation, MPC choosing growth over inflation maintaining
conservative stance. With fear of fiscal slippage creeping in again, market sentiments are expected to remain cautious.

Source: Bloomberg and Extract of Fifth Bi-Monetary Policy Statement of RBI, as on 5th December 2019

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