Highlights of the RBI Monetary Policy (August 2019)

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Source: Highlights of the RBI Monetary Policy (August 2019)

RBI cuts rates by 35 basis points, basis the assessment of the current and evolving macro-economic situation. The Monetary Policy Committee (MPC) is also maintaining an accommodative stance of the monetary policy.
  • RBI cuts rates by 35 bps from 5.75 per cent to 5.40 per cent.
  • It is the fourth rate cut in a row.
  • The decision is in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.
  • Economic activity remained weak in major emerging market economies (EMEs), pulled down mainly by slowing external demand.
  • Crude oil prices fell sharply in mid-May on excess supply from an increase in non-OPEC production, combined with a further weakening of demand.
  • The rate cut has sent a strong signal to domestic banks to cut lending rates before September.
GDP projection lowered to 6.9% from earlier 7.0% for FY 20
  • Domestic economic activity continues to be weak, with the global slowdown and escalating trade tensions posing downside risks.
  • Addressing growth concerns by boosting aggregate demand, especially private investment, will be the highest priority.
Outlook
  • CPI inflation is projected at 3.1 per cent for Q2 FY 20. CPI inflation for Q1:2020-21 is projected at 3.6 per cent
  • The baseline inflation trajectory for the next four quarters will be designed by:
    • The uptick in food inflation which may be sustained by price pressure on vegetables and pulses
    • Uneven spatial and temporal distribution of monsoon that could exert some upward pressure on food items
    • Crude oil prices which despite excess supply, may likely remain volatile due to geo-political tensions in the Middle East.
  • Real GDP growth for 2019-20 has been revised downward from 7.0 per cent in the June policy to 6.9 per cent. GDP growth for Q1:2020-21 is projected at 7.4 per cent.

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