In its Fifth Bi-monthly meet for the FY2019-20, The RBI monetary policy committee, MPC decided to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 5.15 per cent.
Consequently, the reverse repo rate under the LAF remains unchanged at 4.90 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 5.40 per cent. The MPC also decided to continue with the accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target.
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 MPC cited its various rationale both global and domestic which we will further look into, lets first see what LAF means;
LAF or liquidity adjustment facility is a tool used in monetary policy, primarily by the Reserve Bank of India (RBI), that allows banks to borrow money through repurchase agreements (repos) or for banks to make loans to the RBI through reverse repo agreements.
The RBI introduced a LAF as a result of the Narasimha Committee on Banking Sector Reforms (1998). LAF’s can manage inflation by increasing and reducing money supply. LAF can be used as a tool for aiding the banks in times of both slowdown and growth as such the banks can borrow from RBI at repo rate and lend it back the excess cash through reverse repo rate.
Among the global cues that the RBI MPC has looked out for are; US and Euro GDP growth rates and the manufacturing sectors performances, US GDP picked up growth rate, the UK GDP remained stable. Japan’s economy lost momentum. The manufacturing activities in US dropped for fourth consecutive month.
Among emerging market economies (EMEs), GDP growth in China decelerated further in Q3, reflecting weak industrial production and declining exports amidst trade tensions with the US.
Other cues included crude oil prices activities and global financial markets activities.
On Domestic frontier, gross domestic product (GDP) growth moderated to 4.5 percent year-on-year (y-o-y) in Q2:2019-20, extending a sequential deceleration to the sixth consecutive quarter. Sixth quarters consecutive seems worrying but is an admittance too, unlike media houses reporting least GDP growth in SIX years or 26 Quarters.
Retail inflation, measured by y-o-y changes in the CPI, increased sharply to 4.6 percent in October, propelled by a surge in food prices. Fuel group prices remained in deflation. Food inflation spiked to 6.9 per cent in October – a 39-month high – pushed up by a sharp increase in prices of vegetables due to heavy unseasonal rains. Inflation in CPI excluding food and fuel declined further from 4.2 per cent in September to 3.4 per cent in October.
Overall liquidity in the system remained in surplus in October and November 2019 despite an expansion of currency in circulation due to festival demand. Average daily net absorption under the LAF amounted to 1,98,566 crore in October. Monetary transmission has been full and reasonably swift across various money market segments and the private corporate bond market. As against the cumulative reduction in the policy repo rate by 135 bps during February-October 2019, transmission to various money and corporate debt market segments ranged from 137 bps (overnight call money market) to 218 bps (3-month CPs of non-banking finance companies).
In the fourth bi-monthly resolution of October 2019, CPI inflation was projected at 3.4 per cent for Q2:2019-20, 3.5-3.7 per cent for H2:2019-20 and 3.6 per cent for Q1:2020-21 with risks evenly balanced. The actual inflation outcome for Q2 evolved broadly in line with projections – averaging 3.5 per cent. CPI inflation projection is revised upwards to 5.1-4.7 per cent for H2:2019-20 and 4.0-3.8 per cent for H1:2020-21, (H1 and H2 refer to halves of the Financial Year.)
Real GDP growth for 2019-20 is revised downwards from 6.1 per cent in the October policy to 5.0 per cent–4.9-5.5 per cent in H2 and 5.9-6.3 per cent for H1:2020-21.
All members of the MPC – Dr. Chetan Ghate, Dr. Pami Dua, Dr. Ravindra H. Dholakia, Dr. Michael Debabrata Patra, Shri Bibhu Prasad Kanungo and Shri Shaktikanta Das – voted in favour of the decision.
Author’s Note: Citing RBI’s report may get a little bit technical but the report mainly deals with repo rates, inflation and economic growth and its different drivers, which I will try to explain in further articles, to more aware readers though, please find the report link here-under (pdf document):