RBI bimonthly monetary policy, 7th February 2018 Notes

   

RBI bimonthly monetary policy, 7th February 2018 - Repo Rate Unchanged

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The summary of the Policy:

The Reserve Bank of India on 7th February 2018 maintained status quo on the policy rate, but raised red flags about a potential steep spike in prices, fiscal profligacy, and the likely fallout of volatility in global financial markets.

The Reserve Bank of India has kept the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.0 per cent. Consequently, the reverse repo rate under the LAF remains at 5.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 6.25 per cent.

Inflation:

The decision of the MPC is consistent with the neutral stance of monetary policy 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, the RBI said in a statement. The Monetary Policy Committee pegged CPI inflation in the range of 5.1-5.6 per cent for the H1FY19, factoring in the diminishing statistical HRA impact of central government employees.

GVA growth:

The real gross value added (GVA) growth as per the first advance estimates (FAE), on the other hand, is estimated to decelerate to 6.1 per cent in FY18 from 7.1 per cent in 2016-17, due mainly to slowdown in agriculture and allied activities, mining and quarrying, manufacturing, and public administration and defence (PADO) services.

Challenges:

Policy Committee is being challenged by many factors - from inflationary threat due to rising food prices, to higher government spending that would crowd out private investment, to high oil prices. The recent sell off in global financial markets is the latest headache to policy makers. Factoring in domestic adverse developments, bond investors had already sold off which pulled down prices in the past few weeks. Bond yields are at 7.59 per cent, up from 7.43 per cent (January end) before the Union budget on February 1.

Jargon:

Repo rate: Repo rate is the rate at which RBI lends to its clients generally against government securities. A decrease in Repo rate helps the commercial banks to get money at a cheaper rate and increase in Repo rate discourages the commercial banks to get money as the rate increases and becomes expensive.

Reverse Repo rate: Reverse Repo rate is the rate at which RBI borrows money from the commercial banks. The increase in the Repo rate will increase the cost of borrowing and lending of the banks which will discourage the public to borrow money and will encourage them to deposit.

Statutory liquidity ratio: Statutory liquidity ratio is the Indian government term for reserve requirement that the commercial banks in India require to maintain in the form of gold, government approved securities before providing credit to the customers.

Liquidity Adjustment Facility: LAF is used to aid banks in adjusting the day to day mismatches in liquidity. LAF helps banks to quickly borrow money in case of any emergency or for adjusting in their SLR/CRR requirements. LAF consists of repo and reverse repo operations.

Marginal Standing Facility (MSF): Banks borrow from the central bank by pledging government securities at a rate higher than the repo rate under liquidity adjustment facility or LAF in short. The MSF rate is pegged 100 basis points or a percentage point above the repo rate. Under MSF, banks can borrow funds up to one percentage of their net demand and time liabilities (NDTL).

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Also Read: RBI fifth bimonthly monetary policy, FY18

Read 188 times Last modified on Monday, 16 April 2018 14:34
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