The Reserve Bank of India (RBI), in its sixth bi-monthly monetary policy review of 2018-19, has reduced the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 6.50% to 6.25% with immediate effect. Consequently, the reverse repo rate under the LAF stands adjusted to 6.00%, and the marginal standing facility (MSF) rate and the Bank Rate to 6.50%. The RBI also decided to change the monetary policy stance from calibrated tightening to neutral. These decisions are 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.
On the inflation front, the Central Bank has lowered retail inflation (CPI) projection to 2.8% for Q4 FY19, 3.2-3.4% for H1FY20 and 3.9% for Q3FY20, with risks broadly balanced around the central trajectory, citing a normal monsoon in 2019. As per the Monetary Policy Committee (MPC), headline inflation is expected to remain soft in the near term reflecting the current low level of inflation and the benign food inflation outlook. Beyond the near term, some uncertainties warrant careful monitoring.
On the economic growth, RBI is expecting gross domestic product (GDP) growth of 7.4% in 2019-20, 7.2-7.4% in H1 and 7.5% in Q3 – with risks evenly balanced. However, the apex bank raised concerns that in spite of soft crude oil prices and the lagged impact of the recent depreciation of the Indian rupee on net exports, slowing global demand could pose headwinds and added that in particular, trade tensions and associated uncertainties appear to be moderating global growth.
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