RBI keeps the policy repo rate unchanged in fifth Bi-monthly Monetary Policy Statement

In the fifth bi-monthly monetary policy statement announced on Thursday (dated 05.12.2019), MPC decided to keep policy REPO rate under the liquidity adjustment facility (LAF) unchanged at 5.15 per cent. The MPC also decided to continue with the accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target. These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 percent within a band of +/- 2 per cent while supporting growth.

The present key policy rates are as under.

CRR (Cash Reserve Ratio)	4.00%
SLR (Statutory Liquidity Ratio) (effective from Jan 2020	18.50 %*
Repo Rate	5.15%
Reverse Repo Rate	4.90%
MSF Rate (Marginal Standing Facility Rate)	5.40%
Bank Rate	5.40%

Effective from January 2020 revised SLR will be 18.25%. The calibrated quarterly reduction in statutory liquidity ratio (SLR) will continue till it reaches18%.The first reduction of 25 basis points taken effect in the quarter commencing January 2019 at 19.25%

A brief assessment of the domestic economy:

At present call money rate is hovering around 3.50% to 5.50%. It is an indication that the central bank plans to shift towards the quantity of money (or liquidity) and expected to aggressively deploy open market operations (OMO) to release money into the market. Retail inflation, measured by y-o-y changes in the CPI, increased sharply to 4.6 per cent in October, propelled by a surge in food prices. Fuel group prices remained in deflation, while inflation in CPI excluding food and fuel moderated further from its level a month ago. Turning to the drivers of CPI, food inflation spiked to 6.9 per cent in October – a 39-month high – pushed up by a sharp increase in prices of vegetables due to heavy unseasonal rains. Prices of onions, in particular, shot up by 45.3 per cent in September and further by 19.6 per cent in October. Inflation in several other food items such as fruits, milk, pulses and cereals also increased, reflecting diverse factors – the cost push of fodder prices in the case of milk; decline in production and sowing area of pulses; and minimum support price effects. Sugar and confectionery prices moved out of deflation in October as sugarcane output shrank on a y-o-y basis.

Surendra Naik