FIFTH BIMONTHLY MONETARY POLICY FOR YEAR 2017-18:
The Monetary Policy Committee is a six member committee at Reserve Bank of India to decide policy rates. At fifth Bi monthly Monetary Policy for 2017-18, the committee decided to have status quo on policy rates. The repo rate has been maintained at 6.00%, Reverse Repo Rate at 5.75%, MSF and Bank Rate at 6.25% respectively.
The decision of fifth Bi Monthly Monetary Policy, with five votes in favour of maintaining the rates and one for reduction in rate (Dr Ravindra H Dholakia) by 25 basis points, was consistent with neutral stance of monetary policy with the objective of achieving medium-term inflation target of 4% within a band of +/- 2%, while supporting growth.
~ MONETARY POLICY COMMITTEE ~
The Union Government has notified the constitution of the six members Monetary Policy Committee (MPC). The Union Finance Minister has used powers under the section 45ZB of the Reserve Bank of India (RBI) Act, 1934 to constitute MPC. The members of the Monetary Policy Committee are: 1) Sh. Urjit Patel, RBI Governor (Chairperson); 2) R Gandhi: Deputy Governor RBI in charge of Monetary Policy (Member); 3) Michael Patra: Executive Director of RBI (Member); 4) Chetan Ghate: Professor, Indian Statistical Institute (ISI) (Member); 5) Professor Pami Dua: Director, Delhi School of Economics (DSE) (Member) and 6) Ravindra H. Dholakia: Professor Indian Institute of Management (IIM), Ahmedabad (Member).
The MPC has been entrusted with the task of fixing the benchmark policy rate (repo rate) required to contain inflation within the specified target level. The meetings of the MPC will be held at least 4 times a year and it will publish its decisions after each such meeting. The RBI Act was amended by the Finance Act, 2016 to provide for a statutory and institutionalized framework for MPC.
The RBI will set interest rates according to the majority view of the six-member MPC, with the Governor having the casting vote in case of a tie. MPC replaces previous arrangement where RBI Governor along with a Technical Advisory Committee (TAC) taking decisions on monetary policy including setting interest rates. In the previous arrangement TAC was only having advisory functions and the RBI Governor enjoyed veto power over the committee in setting interest rates. New structure under MPC is expected to bring “value and transparency” to monetary policy decisions taken by central banks which have far-reaching implications on economy, investors, savers and borrowers.
IMPORTANT TERMS RELATED WITH MONETARY POLICY
What is an interest rate corridor: Interest rate corridor refers to the window between the repo rate and the reverse repo rate wherein the reverse repo rate acts as a floor and the repo as the ceiling. Ideally, rates in the overnight interbank call money market, where lending and borrowing is unsecured, should move within this corridor. However, when banks are short of funds and the overnight call money rates are high and above the repo rate, banks approach the RBI to borrow under the repo window.
Why is a narrow rate corridor desirable? A narrow rate corridor means that short-term interest rates in the call money market will move within that band. This band was earlier 100 basis points, reduced to 50 basis points and then to 25 basis points vide 1st Bimonthly Monetary Policy for Fy 2017-18. Effectively, the narrower rate corridor will mean there will be less volatility in short term rates.
Standing Deposit Facility: The Demonetization has resulted in glut of liquidity with banks, which Reserve Bank proposes to absorb through various monetary policy instruments. One such instrument being proposed by RBI is Standing Deposit Facility whereby liquidity will be absorbed by RBI without Collateral back up. The SDF proposal is under government consideration.
Why SDF? The banks are flush with funds post demonetization and RBI absorbs liquidity through Monetary Policy tools like Reverse Repo etc. However, when banks park funds with RBI under Reverse Repo, the Reserve Bank of India as per norms gives securities as collateral for placement of funds under Reverse Repo. The RBI proposes to introduce SDF where parking of funds will be freed from the requirement of collaterals.
“Neutral Stance” Neutral Stance mean RBI has flexibility to move in either direction of interest cycle as macro-economic conditions permit.
Policy Rationale: RBI’s policy reflected a continuation of its ‘neutral’ stance.
RBI’s FY18 GVA projection at 7.4%: RBI has given upbeat projection of GVA at 7.40% for FY 17-18 based on
- Revival of consumption demand with rapid re-monetization
- Restoration of cash based activity specifically for various services and unorganized sector
- Effective transmission (implying lower borrowing costs) supporting consumption and investment
- Growth supportive budget with encouraging allocation towards capex, rural development and infrastructure
- Structural Reforms (GST, Bankruptcy code) to boost investor confidence
BANKS CAN INVEST IN REITs: While reviewing the monetary policy, the central bank has proposed that banks be allowed to invest in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). This follows an earlier proposal by market regulator Securities and Exchange Board of India (Sebi). 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.