RBI’s New Monetary Policy

RBI’s New Monetary Policy

5 Key Highlights of RBI’s Monetary Policy.

RBI keeps Repo Rate steady at 6.25%; Reverse-Repo and Bank Rate stand at 5.75% and 6.75%.

Contrary to expectations of a 25 basis point (bps) rate cut, the Reserve Bank of India (RBI) kept steady at 6.25% in its sixth bi-monthly on Wednesday. Consequently, the reverse under the liquidity adjustment facility (LAF) remains unchanged at 5.75%, and the marginal standing facility (MSF) rate and the Bank Rate at 6.75%.

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“A cut of 25 bps was widely expected and would have lifted the sentiment. At this juncture, post long stint of shrinking economy and then demonetisation, people were postponing the demand. This rate cut was necessary from the perspective of bringing that demand back in the system,” said Motilal Oswal, chairman and managing director, Financial Services.

“Given that the main guiding factors of last policy review including global uncertainty, rising and a sticky core largely remained in play since, the hold on rates is in line with broader guidance provided by then,” said Mahendra Kumar Jajoo, ‎Head – Fixed income – ‎Global Investments (India).

Also Read: Most rate sensitive stocks fall after central bank keeps rates unchanged

Here are five key takeaways from the RBI’s monetary policy review:

Gross Value Added (GVA) projection cut to 6.9% for FY18: The has lowered the FY17 projection to 6.9% from the existing 7.1%. For FY18, the central bank has projected the at 7.4%, with risks evenly balanced around it.

Growth, the believes, can recover sharply in FY18. This, the central bank believes can be triggered by revival in discretionary demand held back by demonetisation; pick-up in economic activity in cash-intensive sectors such as retail trade, hotels and restaurants, and transportation, as well as in the unorganised sector; and pick-up in both consumption and investment demand.

targeting: In December, the had projected the headline at 5% in Q4 of 2016-17. For the first half of the next financial year, the now projects to be in the range of 4% to 4.5%, and in the range of 4.5% to 5% in the second half (H2FY18).

“Rising crude oil prices, volatility in the exchange rate on account of global financial market developments and fuller effects of the house rent allowances under the 7th Central Pay Commission (CPC) award which have not been factored in the baseline path remain as the key risks”, the said.

Shift from ‘accommodative’ to ‘neutral’ stance: Given the domestic and global headwinds, the has turned more hawkish as regards rates. The central bank, which till now, promised to remain ‘accommodative’ as regards key rates, has shifted its stance to ‘neutral’.

“The decision of the MPC is consistent with a ‘neutral’ stance of monetary policy in consonance with the objective of achieving consumer price index (CPI) at 5% by Q4 of 2016-17 and the medium-term target of 4% within a band of plus/minus 2%, while supporting growth,” the statement said.

Savings account limits relaxed: While reviewing the monetary policy, the also raised limits for savings accounts from the existing Rs 24,000 to Rs 50,000 per week, staring February 28. “All cash limits will be removed from March 13, 2017,” the said.

The central bank has already removed all withdrawal limits from current accounts on February 01. Limits on withdrawals via cheques and machines were placed following the government’s move on November 08, 2016.

Transmission of policy rates: The Monetary Policy Committee (MPC) believes that the environment for timely transmission of policy rates to banks’ lending rates can be considerably improved.

“This can happen if: (i) the banking sector’s non-performing assets (NPAs) are resolved more quickly and efficiently; (ii) recapitalisation of the banking sector is hastened; and, (iii) the formula for adjustments in the interest rates on small savings schemes to changes in yields on government securities of corresponding maturity is fully implemented,” the statement said.

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