Third Bi-monthly Monetary Policy Statement, 2018-19

Third Bi-monthly Monetary Policy Statement, 2018-19

Third Bi-monthly Monetary Policy Statement, 2018-19

The Reserve Bank of India (RBI) has released the Third Bi-monthly Monetary Policy Statement, 2018-19 on Aug 01, 2018. The six-member monetary policy committee (MPC) of the Reserve Bank of India (RBI) has decided to increase the repo rate by 25 basis points to 6.5% due to inflation concerns.

The Monetary Policy Committee (MPC) of Reserve Bank of India (RBI) in its ‘Third Bi-monthly Monetary Policy Statement, 2018-19’ on Aug 01 has decided to increase the key policy rate or the repo rate by 25 basis points to 6.5 per cent due to inflation concerns. The reverse repo rate has been adjusted to 6.25 per cent.

The RBI move means it’s a back to back interest rate increase. In its June policy meet, the rate-setting panel headed by Governor Urjit Patel raised repo rate by 25 basis points to 6.25 per cent. Back then, that was the first rate increase since Narendra Modi came to power in May 2014.

Dr. Chetan Ghate, Dr. Pami Dua, Dr. Michael Debabrata Patra, Dr. Viral V. Acharya and Dr. Urjit R. Patel voted in favour of the decision; Dr. Ravindra H. Dholakia voted against the decision. 

The rate hike is expected to trigger a spike in bond yields, thus raising further inflation risks. This is the first time the MPC met for three days, instead of the usual two, citing certain ‘administrative exigencies’.

Inflation is projected at 4.6 per cent in Q2, 4.8 per cent in H2 of 2018-19 and 5.0 per cent in Q1:2019-20, with risks evenly balanced (Chart 1). Excluding the HRA impact, CPI inflation is projected at 4.4 per cent in Q2, 4.7-4.8 per cent in H2 and 5.0 per cent in Q1:2019-20.

The MPC reiterates its commitment to achieving the medium-term target for headline inflation of 4 per cent on a durable basis.

RBI has retained GDP growth for 2018-19 at 7.4% as projected in the April policy. GDP growth is projected in the range of 7.5-7.6% in H1 and 7.3-7.4% in H2, with risks evenly balanced; GDP growth for Q1:2019-20 is projected at 7.5 per cent.

The next meeting of the MPC is scheduled from October 3 to 5, 2018

Monetary and Liquidity Measures

On the basis of an assessment of the current and evolving macroeconomic situation at its meeting today, the Monetary Policy Committee (MPC) decided to:
  • increase the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 6.5 per cent.
Consequently, the reverse repo rate under the LAF stands adjusted to 6.25 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 6.75 per cent.

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.

Current Policy Rates:

Policy Repo Rate 6.50 %
Reverse Repo Rate 6.25 %
Marginal Standing Facility Rate 6.75 %
Bank Rate 6.75 %

Reserve Ratios:

CRR 4 %
SLR 19.5%

The remaining policy statements would be released by RBI as stated below - 

Policy Statement Dates of Release
First Bi-monthly Monetary Policy Statement for 2018-19 5th April 2018
Second Bi-monthly Monetary Policy Statement for 2018-19 6th June 2018
Fourth Bi-monthly Monetary Policy Statement for 2018-19 4th October 2018
Fifth Bi-monthly Monetary Policy Statement for 2018-19 6th December 2018
Sixth Bi-monthly Monetary Policy Statement for 2018-19 6th Feb 2019

Let us now understand some common terms of the Policy rates - 

Repo Rate 

It is the rate at which RBI lends money to commercial banks.

Reverse Repo Rate: 

It is the rate at which RBI borrows money from commercial banks.

Cash Reserve Ratio (CRR)

The share of net demand and time liabilities (deposits) that banks must maintain a cash balance with the Reserve Bank.

Statutory Liquidity Ratio (SLR)

The share of net demand and time liabilities (deposits) that banks must maintain in safe and liquid assets, such as, government securities, cash, and gold.

Bank Rate

It is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers for the long term.

Marginal Standing Facility Rate (MSF)

The rate at which the scheduled banks can borrow funds from the RBI overnight, against the approved government securities is termed as MSF.
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