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Policy repo rate kept unchanged at 6.5%
* Policy repo rate under the liquidity adjustment facility (LAF) remained unchanged at 6.5%
* Consequently, the reverse repo rate under the LAF remains at 6.25%, and the marginal standing facility (MSF) rate and the Bank Rate at 6.75%.
* Policy stance maintained at ‘calibrated tightening’
* The RBI revised lower the CPI inflation target to 2.7-3.2% in H2FY19 from 3.8-4.5% projected earlier
* GDP growth forecast retained at 7.4% for FY19
* MPC proposed lowering of SLR by 150 bps with 25 bps cut every quarter from January onwards
* Retail loans (floating) will link to external benchmarks from April 1’ 2019
* MPC ruled out any special liquidity window for NBFCs.
* As per MPC, overnight call rate hovering near repo rate indicating sufficient liquidity in the banking system.
In line with the market expectation, the Reserve Bank of India (RBI), in its fifth bi-monthly monetary policy statement’ 2018-19, has kept the repo rate unchanged at 6.5% for the second consecutive meeting considering the dramatic fall in crude oil prices and recent strengthening of Indian Rupee. However, the bank has maintained its policy stance at ‘calibrated tightening’ in spite of reducing the inflation projection indicating pause in repo rate in the coming future. To support the liquidity condition, MPC proposed lowering of SLR by 150 bps with 25 bps cut every quarter from January onwards. MPC also stated opening of accommodative policy if upside risks to inflation does not materialize and inflation eased further. Validating the ‘calibrated tightening’ stance, the MPC stated that incoming data will ascertain the durability nature of inflation softening and allow better judgment on future policy action. It also articulated health growth in FY19 and sufficient liquidity in the banking system with ruling out the set of special liquidity window for NCFCs. MPC also maintained its GDP growth forecast at 7.4% even through a sharp cut in Q2FY19 GDP to 7.1% (8.2% in Q1FY19), emphasizing the building strength in manufacturing sector and gradually increasing capacity utilization level in the economy. In a significant development and to make better transmission of interest rate, MPC proposed of linking retail & MSMEs loans (floating) to external benchmarks like GoI 91 days treasury bill and repo rate etc. Final guidelines on linking of loans to benchmark will be issued by the end of December.
All members of MPC voted no rate hike
Five members of MPC voted to keep stance at 'calibrated tightening'; while one member voted for ‘neutral’ stance
MPC’s view on inflation
Deflationary trend witnessing in some of the key food items over the past few months has more than offset by the impact of high fuel and core items’ prices. Inflation expectations of households, measured by the November 2018 round of the Reserve Bank’s survey, softened by 40 basis points (bps) for the threemonth ahead horizon over the last round reflecting decline in food and petroleum product prices. Broad based weakening of food items will continue to impart downward pressure on the headline inflation. However, MPC noted a broad based increase in inflation in non-food groups and also highlighted increased uncertainties around the prevailing crude oil prices. Effect of the 7th Central Pay Commission’s HRA increase has continued to wane along expected lines. Taking all these factors into consideration and assuming a normal monsoon in 2019, inflation is projected at 2.7-3.2% in H2FY19 (revised lower from earlier projection of 3.9-4.5%) and 3.8-4.2% in H1FY20 with risks tilted to the upside. MPC added that while the recent food inflation prints have surprised on the downside and prices of petroleum products have softened considerably, it is important to monitor their evolution closely and allow heightened short-term uncertainties to be resolved by incoming data.
MPC added that while the recent food inflation prints have surprised on the downside and prices of petroleum products have softened considerably, it is important to monitor their evolution closely and allow heightened short-term uncertainties to be resolved by incoming data.
RBI retains GDP growth at 7.4% in FY19
After four consecutive quarters of acceleration, India’s GDP growth slowed down to 7.1% in Q2FY19 due to reduction in private spending and net exports. However the capital investments has strengthen with GFCF expanded by double-digits for the third consecutive quarters driven mainly by the public sector’s thrust on national highways and rural infrastructure. MPC highlighted building strength in the industrial sector given the increasing capacity utilization and manufacturing PMI.
Improving Capacity Utilisation level
Capacity utilisation (CU) increased from 73.8% in Q1FY19 to 76.1% in Q2FY19 and manufacturing PMI touched an eleven month high at 54 in November. As per RBI’s Industrial Outlook Survey (IOS), the overall business sentiment in Q3 remained stable and demand outlook has improved for Q4 with sustained optimism about production and exports.
MPC highlights concerns for agriculture sector and exports outlook
However the central bank expressed concern on rabi carp sowing which has been 8.3% YoY lower so far due to deficit monsoon and a delayed kharif harvest across states. North-east monsoon as on November 28 was 49% below the long period average. Storage in major reservoirs, the main source of irrigation during the rabi season, was at 61% of the full reservoir level as on November 29. Slowing global demand and rising trade tensions can also pose negative risk to exports. MPC has expressed more confidence on the declining crude oil price which is expected to boost India’s growth prospects by improving corporate earnings and raising private consumption through higher disposable incomes.
GDP projects to grow at 7.2-7.3% in H2FY19
Furthermore, increased capacity utilisation in the manufacturing sector also portends well for new capacity additions. Significant acceleration in investment activity and high frequency indicators suggest that it is likely to be sustained. Credit offtake from the banking sector and FDI inflows strengthen even as global financial conditions have tightened Based on an overall assessment, GDP growth for FY19 has been projected at 7.4% (7.2-7.3% in H2FY19) and for H1FY20 at 7.5% with risks somewhat to the downside.
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