Assignment 3:

Write a well-researched detailed note on the recent monetary policy

stance of RBI and its impact on economic growth and price stability in
India. You need to take into account the recent policy review and the
various critical analyses by international institutions and rating agencies
regarding the same. References must be mentioned in Harvard Style of
referencing.
In 2019 till 10th October 4 monetary policy has come up. In April, June, August and October and
next will come in December 5th and then in February. The monetary policy is a policy
formulated by the central bank, i.e., RBI (Reserve Bank of India) and relates to the monetary
matters of the country. The policy involves measures taken to regulate the supply of money,
availability, and cost of credit in the economy.
The policy also oversees distribution of credit among users as well as the borrowing and lending
rates of interest. In a developing country like India, the monetary policy is significant in the
promotion of economic growth.
The various instruments of monetary policy include variations in bank rates, other interest rates,
selective credit controls, supply of currency, variations in reserve requirements and open market
operations.
The Reserve Bank of India’s Monetary Policy Committee (MPC) cut all monetary policy rates
by 0.25 percentage points at its 2–3 April meeting, reducing the repo rate to 6.00%, the marginal
standing facility to 6.25% and the reverse repurchase rate to 5.75%.April’s monetary policy
decision was heavily influenced by inflation considerations. In February, although consumer
price inflation accelerated to 2.6% from 2.0% in January, it remained close to the lower bound of
the MPC’s target range of 2.0% to 6.0%. Moreover, the MPC lowered its inflation forecast for
April–September to 2.9%–3.0% from 3.2%–3.4%, and its forecast for October–March to 3.5%–
3.8% from 3.9%. Anticipated weaker economic activity growth—reflected by the MPC cutting
its GDP growth forecast for April 2019–March 2020 to 7.2%, down from 7.4%—is a key reason
behind the more modest inflationary pressures that are expected in the coming months.

June
The six-member RBI’s monetary policy committee (MPC) led by governor Shaktikanta Das cut
the repo rate to 9-year low as demand slowdown, liquidity crunch weighed on central bank’s
mind. The committee cut repo rate by 25 bps to 5.75 per cent and also changed policy stance to
accommodative from neutral. The reverse repo rate under the LAF stands adjusted to 5.50 per
cent, and the marginal standing facility (MSF) rate and the Bank Rate to 6.0 per cent. This is the
third meeting under RBI governor Shaktikanta Das, who took charge in December 2018, and the
first meeting of FY20. In April, the MPC had cut repo rate by 25 basis points to 6 per cent.

Rate cut is mild inflation tamer

"A 25 bp rate cut falls short of what is required with a delayed and expected insufficient
monsoon. This cut is a mild inflation tamer but not the big growth driving rate cut that the
economy needs. Easing into growth through stances is not optimal and an abrupt and decisive
rate cut would have pushed the market forward significantly. A substantial rate cut has been
overdue for two policy sessions. We hope the accommodative policy stance will deliver that the
next time around", Ranjan Chakravarty, Product Strategy, MSE, said.

RBI policy announcement not as expected by stock markets

“The RBI policy announcement is exactly on the same lines as expected by most of the market
participants. The repo rate cut of 0.25% and the change of stance from neutral to accommodative
is key to supporting the sagging economic growth. The projected growth has been lowered to
7%. The policy also has broad indications of more action on the liquidity front from the RBI in
the coming days. This also confirms the commitment of the central bank to better transmission of
the rate cut effects through liquidity”, Joseph Thomas, Head Research- Embay Wealth
Management said.

Resolution disappointed on rate cut transmission

The resolution made its disappointment clear at the transmission of rate cuts, saying the weighted
average lending rate has gone down by only 0.21 per cent, while the same for older loans has
increased 0.04 per cent, as against policy rate cuts of 0.50 percentage point.

DHFL default: RBI to ensure financial stability

The central bank is closely monitoring the developments in the NBFC sector and housing finance
companies and will ensure that financial stability is maintained, governor Shaktikanta Das said
Thursday. "We have been closely monitoring the performance and developments in the NBFC
and HFC sectors," Das told reporters said.

Stock markets had already factored in rate cut

"While the rate cut of 25 basis points was in line with our expectation, concerns over growth and
challenges regarding liquidity continue to linger. The market is not necessarily cheering the rate
cut as it had already factored in and something more was expected," Naveen Kulkarni, Head of
Research, Reliance Securities.

Stock markets crack after RBI Monetary Policy

The benchmark BSE Sensex cracked over 300 points and the NSE Nifty dropped below the
12,000 level in afternoon session Thursday tracking losses in financial stocks after the Reserve
Bank cut its key interest rates for the third time in a row. The 30-share index was trading 333.32
points, or 0.83 per cent, lower at 39,750.22, and the broader Nifty fell 114.35 points, or 0.95 per
cent, to 11,907.30.

Rate cut to induce liquidity amid slowdown concerns

"The rate cut of 25bps was imperative to induce liquidity in the downward spiral economy on the
back of all indicators showing slowdown like the peak unemployment rate, shrinking GDP rates,
nose-diving auto sales numbers, etc. Since the CPI was well under 2.5% and recent crude prices
dip, a higher rate cut would have been more cheerful for the markets. The stance change from
neutral to accommodative by RBI indicates the cognizance about the current fragile business
environment and we expect further rate cuts in times to come. Rate cuts shall enable affordability
in terms of home loans and thus lowered EMI, lower GST, tax rebate for income up to Rs6.5
lakhs (including section 80C) for the middle class as per as interim budget. All these shall give
some sales impetus to real estate," Parth Mehta, Managing Director, Paradigm Realty said.

Policy rate cut likely to provide respite to the real estate sector

“The first rate cut in the newly elected government’s regime is certainly a welcome step,
especially for the real estate sector. The benefit of lower policy rate in terms of better credit cost
as well as higher liquidity will hopefully be transmitted further by banks to NBFCs as well as
home buyers. Also, the change in policy stance from neutral to accommodative is a welcome
shift as it lays ground for further rate cuts. The cash-crunched NBFCs will definitely benefit
from inflow of capital which will in turn benefit developers as well as home-buyers. NBFCs
have been facing a liquidity crisis and this has negatively impacted their loans to real estate,
including construction finance. Besides capital infusion into this important financier segment,
this rate cut will also improve the home-buyers affordability and stimulate housing demand at
this critical juncture," Shishir Baijal, Chairman & Managing Director, Knight Frank India said.

Nifty down after RBI Monetary Policy

Indices extend the drop; Nifty now down more than 100 points, and Nifty Bank sheds nearly 400
points after the RBI Monetary Policy.
RBI on inflation

Risks around the baseline inflation trajectory emanate from uncertainties relating to the
monsoon, unseasonal spikes in vegetable prices, international fuel prices and their pass-through
to domestic prices, geo-political tensions, financial market volatility and the fiscal scenario, the
RBI said.

Growth, inflation focus areas

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, the RBI also said in the statement.

Unanimous vote on rate cut, policy change

MPC voted unanimously for rate cut by 25 bps and stance change.

CRR remains unchanged

The CRR — Cash Reserve Ratio — is kept unchanged. The RBI MPC voted unanimously by 6-0
in favour of a 25 basis points policy rate cut. Additionally, the policy stance has also been eased
to ‘Accommodative’ from ‘Neutral’. “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,” RBI said in its monetary and credit policy
statement.

Reverse repo at 5.50%

The reverse repo rate under the LAF stands adjusted to 5.50 per cent, and the marginal standing
facility (MSF) rate and the Bank Rate to 6.0 per cent.

August
Managing director and CEO of Union Bank of India Rajkiran Rai G said that the MPC is likely
to cut rate by 25 basis points.

"At this point of time we need growth impetus. I am sure they will reduce rates," he said.

Industry body CII in a statement said the central bank started its interest rate easing cycle in
February 2019, taking cognizance of the headwinds to growth and inflation reading remaining
below the RBI's target of 4 per cent.
However, the transmission of the rate-cuts to the end-consumers has remained very gradual and
relatively lower than the repo rate revisions, it said
The CII said the RBI should cut cash reserve ratio (CRR) by 50 bps which will release around Rs
60,000 crore into the system.

"This along with infusing liquidity in the banking system will also reduce the burden on banks'
resources, given the fact that currently, the credit-deposit ratio is hovering at a high of 77-78 per
cent," it ..

October
The Reserve Bank of India has cut the repo rate by 25 basis points in today’s review, the fifth
time in a row. Since February, the RBI has cut the repo rate by 135 basis points. The repo rate is
now 5.15 per cent. However, the latest cut in the repo rate is more likely to make the retail loans
cheaper as most of the banks have started to issue repo rate-linked loans. Earlier, the measures
related to the reduction in the lending rates could not reach the end customer substantially.
“The RBI has already cut rates by 110 basis points in its four meetings but the transmission is
bad. Only 30-40 per cent of repo rate cuts are actually transferred into a lower lending rate,”
Pranjul Bhandari of HSBC Securities and Capital Markets said in an interview with ET Now.
Due to the projection of continuing weak demand, volatile oil prices and near-term price
pressures, the RBI has also revised CPI inflation projection slightly upwards to 3.4 per cent for
Q2 FY20, while projections are retained at 3.5-3.7 per cent for H2 FY20. However, given that
inflation is still within the RBI’s target range, the RBI has maintained its stance as
‘accommodative’. Meanwhile, amid the sustained weakness in demand, the RBI has lowered the
GDP forecast for the current fiscal year to 6.1 per cent from 6.9 per cent.