Sixth Bi-monthly Monetary Policy 2018-19

The Monetary Policy Committee (MPC) today announced sixth Bi-monthly monetary policy 2018-19 of RBI. This the first policy meeting under the new Governor Shaktikanta Das.

The MPC has decided to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points. MPC also decided to change the monetary policy stance from calibrated tightening to neutral.

The rate cut comes as a surprise because in last meeting MPC changed stance to calibrated tightening from neutral. So many were expecting change in monetary policy stance and no rate change this time and expecting rate change may be in next policy meeting.

The decision to change the monetary policy stance was unanimous. As regards the reduction in the policy repo rate, Dr. Ravindra H. Dholakia, Dr. Pami Dua, Dr. Michael Debabrata Patra and Shaktikanta Das voted in favour of the decision. Dr. Chetan Ghate and Dr. Viral V. Acharya voted to keep the policy rate unchanged.

Key Takeaways:-

Repo rate cut by 25 basis points. Changed from 6.5% to 6.25%.
Reverse repo rate under the LAF (Liquidity Adjustment Facility) stands adjusted to 6.0%, and the marginal standing facility (MSF) rate and the Bank Rate to 6.5%.
Medium-term target for consumer price index (CPI) inflation is set to 4% within a band of +/- 2 per cent, while supporting growth.
while revenue expenditure of the Centre, excluding interest payments and subsidies, contracted in Q3, that of States increased sharply, thus maintaining overall growth in government spending.
Rabi sowing so far (up to February 1, 2019) has been lower than in the previous year, but the overall shortfall of 4.0% across various crops is expected to catch up as the season comes to a close. The lower rabi sowing reflects a deficient north-east monsoon (44% below the long period average); however, storage in major reservoirs – the main source of irrigation during the rabi season – at 44% of the full reservoir level (as on January 31, 2019) was marginally higher than in the previous year. The extended period of cold weather in this year’s winter is likely to boost wheat yields, which would partly offset the shortfall, if any, in area sown.
The year-on-year (y-o-y) growth in core industries decelerated to 2.6% (y-o-y) in December, pulled down by a slowdown in the production of electricity and coal; and contraction in petroleum refinery products, crude oil and fertilisers output.
Sales of motorcycles and tractors imply weakening of rural demand in December. Sales of passenger cars – an indicator of urban demand – contracted, possibly reflecting volatility in fuel prices and mandated long-term insurance premium payments. Commercial vehicle sales also shrank in December 2018 from a high base of the previous year.
Indicators of the construction sector, viz., consumption of steel and production of cement, continued to show healthy growth.
Retail inflation, measured by y-o-y change in the CPI, declined from 3.4% in October 2018 to 2.2% in December, the lowest print in the last eighteen months. Continuing deflation in food items, a sharp fall in fuel inflation and some edging down of inflation excluding food and fuel contributed to the decline in headline inflation.
CPI inflation excluding food and fuel decelerated to 5.6% in December from 6.2% in October, dragged down mainly by the moderation in the prices of petrol and diesel in line with the decline in international petroleum product prices. Housing inflation continued to edge down as the impact of the house rent allowance (HRA) increase for central government employees dissipated. However, inflation in several of the sub-groups – household goods and services; health; recreation and amusement; and education – firmed up in December, offsetting much of the impact of lower inflation in petrol, diesel and housing.
Export growth on a y-o-y basis was almost flat in November and December 2018, primarily due to a high base effect and weak global demand. While growth in exports of petroleum products remained positive, non-oil exports declined, dragged down by lower shipments of gems and jewellery, engineering goods, meat and poultry. Import growth slowed in November and turned negative in December 2018. While imports of petroleum (crude and products) rose in line with the increase in import volumes, non-oil imports such as pearls and precious stones, gold, electronic goods and transport equipment, recorded declines.
India’s foreign exchange reserves were at US$ 400.2 billion on February 1, 2019.
The path of CPI inflation is revised downwards to 2.8% in Q4:2018-19, 3.2-3.4% in H1:2019-20 and 3.9% in Q3:2019-20.
GDP growth for 2019-20 is projected at 7.4% – in the range of 7.2-7.4% in H1, and 7.5% in Q3.