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Highlights of the RBI-MPC First Bi-Monthly Monetary Policy Statement, 2019-20

  • Reduced the policy repo rate under the Liquidity Adjustment Facility (LAF) by 25 basis points (from 6.25% to 6%)
  • Member voted 4-2 in favour of the decision to reduce the policy repo rate by 25 basis points
  • Maintained the neutral stance of monetary policy
  • Member voted 5-1 in favour of the decision to maintain the neutral stance of monetary policy
  • Permit banks to reckon an additional 2% of Government Securities under SLR for computing LCR in a phased manner
  • CPI inflation projection for Q4FY19 reduced from 2.8% to 2.4%
  • CPI projection of H1FY20 lowered from 3.2-3.4% to 2.9-3.0% & projection for H2FY20 pegged at 3.5-3.8% vs earlier projection of 3.9% in Q3FY20 with risks broadly balanced
  • GDPprojection of FY20 reduced from 7.4% to 7.2%GDP projection for H1FY20 & H2FY20 pegged at 6.8-7.1% and 7.3-7.4% with risks evenly balanced
  • Inflation projection is based on normal monsoon in 2019
  • Early reports suggest some probability of El Nino effectsin 2019
  • Flagged concern about the sustainability of softening fuel inflation
  • Projected uncertain outlook with respect to the movement in oil price
  • Expressed concern about the elevated core inflationwith some pick up in February
  • Combined fiscal situation of States and Central Government needs careful monitoring
  • MPC notes negative output gap and domestic economy is facing headwinds on the global front
  • Lower growth and inflation projection indicates probability of further monetary easing
  • However, this is contingent upon the stance of key central banks and crude price movement
  • Likely to provide adequate system liquidity through combination of tools going forward
  • 25 bps repo rate cut with the possibility of further easing accompanied by durable liquidity injection is positive for short dated bond upto 5 year
  • Additional SLR-LCR overlap of 2% over a period is likely to negatively impact long dated bond through lower demand
  • On balance steeper yield curve is expected going forward with widened spread between longer and shorter end of the curve
  • Likely near term range for 10 year Government Securities 7.25-7.50%
Insights: Apr 05, 2019