RBI  Monetary  Policy  Review

Assessing  the  impact  and  reasons  behind  the  recent  monetary  policy  stance  
RBI’s Monetary Policy Committee increased the reverse repo ra tes by 25 bps to 6.00% while
What keeping the repo-­‐‑rate fixed at 6.25%. Marginal Standing Facility, on the other hand, has been
reduced by 25 bps to 6.5%
Rise in wholesale and retail inflation, Increasing upside inflation risks posed by Risk Factors
Why
and threat of missing Inflation Targets in the future disallowed any repo-­‐‑rate cuts

Reverse repo-­‐‑rate hike is expected to absorb surplus liquidity with the banks (pegged at INR 4
Impact
lakh crores, Mar’17) & is expected to align the dropping Overnight Rates with the repo rate

Rise Risk  Factors Targets Overnight   Rate

Wholesale inflation Upside risks to inflation are RBI expects inflation to It refers to the rate a t
rallied to a 39 months posed by volatility in global average at 4.5% for first which banks lend to each
high of 6.55% while crude oil prices, forthcoming half of FY18 and 5.0% other for short durations.
retail inflation inched at El-­‐‑Nino, implementation of for second half of FY18. It witnessed a sharp
3.65% in February allowances of 7 th pay RBI targe ts an overall decline in last 6 months
indicating upward trend commission & uncertainty inflation rate of 4% with since Nov’16 due to
in future inflation (see related to GST an allowance of +/-­‐‑ 2% surplus liquidity with the
graph below) implementation banks (see graph below)

Inflation Overnight  Call  Rates

Wholesale   Inflation   (%) Retail   Inflation   (%) Repo   Rate   (%) Overnight   C all   Rates   (%)

7 6.60

6 6.50

5 6.40

4 6.30

3 6.20

2 6.10

1 6.00

0 5.90
A PR ' 16 JU N ' 1 6 A U G ' 16 O C T' 1 6 DEC' 16 F EB ' 17 A P R ' 1 6 JU N ' 1 6 A U G ' 1 6 O C T' 1 6 D E C ' 1 6 F E B ' 1 7

We believe the move to increase the reverse repo rate is in line with RBI’s neutral monetary policy
stance and does not present a hawkish move signaling any future rate hikes/ monetary policy
Our   tightening. Also, we believe other liquidity absorption moves would follow. RBI has already proposed
View the option of Standing Rate Fa cility by which banks can park their excess funds with RBI without
receiving any collateral.

Presented  by  The  Economics  and  F inance  Society,  F MS