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First monetary policy review in 2017-18

The Reserve Bank of India, in its first monetary policy review of financial year 2017-18, kept the repurchase (repo) rate unchanged at 6.25%, citing upward risks to inflation and global uncertainty.

The Monetary Policy Committee, however, raised the reverse repo rate by 0.25 basis points to 6%, and cut the marginal standing facility (MSF) rate to 6.5%. “The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth,” said RBI in its policy statement.

What
  1. RBI hiked reverse repo rate by 25 bps to 6.00% thereby reducing the corridor between repo and reverse repo to 25 bps from the existing 50 bps.
  2. The essential aim seems to be ensuring a sharper focus on the keeping overnight rates (especially the overnight call money rate) aligned to the repo rate
  3. The central bank has proposed that banks be allowed to invest in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs).
  4. This follows an earlier proposal by market regulator Securities and Exchange Board of India (Sebi).
  5. The RBI proposed to allow banks to participate in Real Estate Investment Trusts (REIT) and Infrastructure Investment Trusts (InvITs) following a proposal by market regulator Securities and Exchange Board of India (SEBI). Banks would be allowed to invest in these instruments within the stipulated limit of 20 percent of net-owned funds.
  6. One of the highlights of today’s policy was the decision to allow banks to invest in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (INVITs) within the 20% umbrella limit.
  7. It will allow banks to invest in an important asset class thereby providing much needed boost to this segment. Owing to better liquidity, the cost of capital for developers in the commercial segment will come down in the future.
Inflation projection
  1. The RBI expects the volatility in global crude prices to impact the consumer price inflation (CPI) trajectory going ahead. Much of the impact of the fall of $4.5 per barrel in international prices of crude since early February, the RBI feels, would feed into the CPI print in April as its cumulative pass-through occurred with a lag in the first week of this month.
  2. CPI inflation is set to undershoot the target of 5% for Q4 of 2016-17 in view of the sub-4% readings for January and February. For 2017-18, inflation is projected to average 4.5% in the first half of the year and 5% in the second half.
  3. The RBI also expects the El Niño event around July-August, the implementation of the allowances recommended by the 7th CPC and the the one-off effects of the GST to put upward pressures on the inflation.
Liquidity
  1. The surplus liquidity in the banking system declined from a peak of around Rs 7-lakh crore on January 4, 2017 to an average of Rs 6-lakh crore in February and further down to Rs 4-lakh crore in March.
  2. Currency in circulation expanded steadily during this period. Its impact on the liquidity overhang was, however, partly offset by a significant decline in cash balances of the Government up to mid-March which released liquidity into the system.
  3. The central bank intends to keep managing liquidity via Market Stabilization Scheme (MSS) and Open Market Operations (OMOs).
Growth
  1. The RBI projects the GVA growth to strengthen to 7.4% in 2017-18 from 6.7% in 2016-17, with risks evenly balanced.
  2. It identified several favourable domestic factors — the pace of remonetisation, significant improvement in transmission of past policy rate reductions, rural demand, and infrastructure, the roll-out of the GST, the institution of the Insolvency and Bankruptcy Code, etc. — to boost investment and growth.

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