RBI Monetary Policy – March 2020 Updates

RBI Monetary Policy
The monetary policy that is laid down by The Reserve Bank of India (RBI) to manage the country’s financial inflow i.e. to ensure money supplies effectively and interest rate and is known as Monetary Policy. This policy is announced by the Monetary Policy Committee (MPC) which consists of six-panel members including the Reserve Bank of India (RBI) Governor.

Based on the current global and domestic economic market trends in addition to evolving macroeconomic situations such as inflation, liquidity and consumption, an assessment is done and a benchmark interest rate is fixed which is known as the Repo Rate.

Update 27th March 2020: Due to the outbreak of COVID-19 globally which also affectd India, to deals with the COVID-19 pandemic RBI Governor Shaktikanta Das on 27th March 2020 has announced major economic measures as decided by the Monetary Policy Committee. Follwing are the highlights of his accouncement:

Extend loan moratorium and repayment schedule by 3 months.
Cuts repo rate by a 75 basis points to 4.4%, this is lowest ever repo rate.

Cuts CRR by 100 bps to 3%, unlock Rs 1.37 lakh crore liquidity in the Banking system.
Lowers reverse repo rate by 90 basis points.

Assures Bank depositors their money is safe.

RBI recently released the much speculated 6th bi-monthly Monetary Policy for 2019-2020 on February 6, 2020. As expected and widely discussed the repo rate is unchanged at 5.15%. Mr. Shaktikanta Das the current Governor of RBI, who led the MPC informed that they took the decision to not change the policy repo rate as it is essential to revive the country’s economic growth as well as a measure to ensure inflation remains under control.

The Reverse Repo Rate is the rate at which RBI borrows money from our country’s commercial bank. Usually for short terms commercial banks do lend money. In the 6th bi-monthly Monetary Policy for 2019-2020 the reverse repo rate subsequently was also not changed and it is at 4.90%. The Marginal Standing Facility (MSF) rate and the Bank Rate is at 5.40%. It must be noted that all six-panel members of RBI MPC unanimously voted for these decisions.

There are several factors both in domestic as well as global market that will result in positive impacts. Prior to the formal announcement from the RBI MPC most economists believed that they will continue to retain an accommodative stance as retail inflation is on the sharp rise to a five-year high of 7.35%. They also maintained that accommodative stance of maintaining status quo implied it was biased in favour of cutting the rate to boost growth and policy provided them with the authority to later take further action. The GDP growth projected for 2019-20202 was also brought down to 5%.

Due to unexpected rainfall during October and November 2019 many vegetable items particularly onions majorly contributed to food inflation. However, onion pricing is now stabilised, vegetable production is estimated to increase at 2.6% because Rabi sowing is higher by 9.5% as compared to the previous year. This is because water storage in major reservoirs is at 70% level unlike 45% to previous year, this has contributed to an advance rise estimate in horticulture production at 0.8%. As the rural economy is highly dependent on Agriculture the rural spending power will be positively affected due to these factors. Inflation though may be affected by rise in costs of milk, pulses and other proteins.

Also, the Index of industrial production (IIP) shows an improvement in November 2019 onwards. Sourced by the information from the manufacturing purchasing managers’ index (PMI) because of an increase in output and new orders the pick-up rose sharply to 55.3 % for January 2020 from 51.2% in November 2019.

Overall the real estate industry sector may see stability with regards to investments and purchase behaviour. Current decision of RBI MPC also favours the Government’s efforts to help the real estate industry sector come out of the current crisis situation. The new policy will assist the developers to complete their projects, a constant infrastructure pricing will ensure stability in prices, with the loan restructure in this year’s budget it will boost lending for housing and development while the bank’s need not worry of these projects becoming non-performing assets. The real estate industry sector thus at large will be steady.

Globally the economic activity is slow-paced. Except for the US, where it’s economy grew by 2.1%, most other countries worldwide such as France, Italy in Europe, UK, Japan, South Africa and China overall the Q4 economic activity is slumped. There is a steady decline in industrial production with many productions shrinking or pulling down as the consumer’s confidence is weakening, their spending power is restrained and the overall global demand is low. Retail sales demand is diminishing. Factors contributing to such low confidence in the economy is geopolitical tension between US and Iran in early January where prices of gold and crude oil surged up. Gold prices continued to rise while crude oil price dipped sharply later on. Coronavirus outbreak has adversely impacted growth and has caused disruptions in demand-supply. In January, the US dollar strengthened impacting the US bond markets. Towards end-January, the Equity markets rallied across AEs and EMEs, turning bearish.

Although an overall economic revival shall only happen gradually as indicated in the points above and considering there are yet many evolving factors that will gain traction and change the global market dynamics. The RBI MPC are optimistically hoping that these policy decisions will positively impact our country’s economy and bring about an expected growth from the lull.