Since the inception of the MPC, all members have voted in unanimity on policy rates. However, at 2nd Bi monthly Monetary Policy for 2017-18, not all members accorded in favour of a status-quo with one member (Dr. Dholakia) dissenting a status-quo. The main highlights of the policy are as under:-

  • Repo rate remained unchanged at 6.25 per cent
  • SLR has been cut by 50 bps, from 20.5 per cent of Net Demand and Time Liabilities to 20.00 per cent from the fortnight commencing June 24, 2017
  • CPI inflation is projected in the range of 2 – 3.5 per cent in the first half of the year and 3.5 – 4.5 per cent in the second half. Medium term target remains at 4 per cent within a band of +/- 2 per cent
  • GVA for 2016-17 has been pegged at 6.6 per cent, 0.1 percentage point lower than the second advance estimates released in February 2017

The projection of real GVA growth for 2017-18 has accordingly been revised 10 bps downwards from April 2017 projection to 7.3 per cent, with risks evenly balanced


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.

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.


The RBI carrying on its ‘neutral’ stance has kept the policy Repo Rate under the Liquidity Adjustment Facility (LAF) unchanged at 6.25 per cent.  The Repo Rate has been maintained at 6.25, however LAF corridor has been narrowed with Reverse Repo Rate set at 6.00% and MSF Rate and Bank Rate at 6.50%.   Narrower gap of 25 basis points from Repo Rate can contribute to finer alignment of the operating target with the policy rate.  The decision of the MPC is consistent with a neutral stance of monetary policy 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.

The policy rates after announcement of 1st BI Monthly Monetary Policy 2017-18 are as under:

Repo Rate                                6.25%

Reverse Repo                           6.00%

MSF                                             6.50%

Bank Rate                                 6.50%

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 projects CPI inflation at 4.5% in H1FY18. Various which can put pressure and elevate the prices and pose upside risks to the inflation trajectory in H2FY18 are

  1. Rising probability of El-Nino implying an uncertain south west monsoon
  2. Implementation of 7th PC allowances, specifically HRA which would add 100- 150 bps to the headline rate
  3. Roll out of GST making certain services expensive
  4. High Government deficit which could further bear adverse ramifications from the announced farm loan waiver
  5. Overall stubborn core inflation which remains higher than headline rate
  6. Narrowing output gap with growth revival
  7. Unfavorable base effects and
  8. Global reflation.

Considering these upside risks RBI inched up H2FY18 inflation projection to 5%. Targeting 4% inflation amid rising price pressures mandates Central Bank vigilance and policy room to act either ways.

RBI’s FY18 GVA projection at 7.4%: RBI has given upbeat projection of GVA at 7.40% for FY 17-18 based on

  1. Revival of consumption demand with rapid re-monetization
  2. Restoration of cash based activity specifically for various services and unorganized sector
  3. Effective transmission (implying lower borrowing costs) supporting consumption and investment
  4. Growth supportive budget with encouraging allocation towards capex, rural development and infrastructure
  5. 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.