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The committee headed by the RBI Governor Urjit Patel declared the first monetary policy for FY18-19. RBI has decided to have a status quo policy as the repo rate and the reverse repo rate remain unchanged at 6% and 75% respectively. The Marginal Standing Facility (MSF) and the Bank Rate are 6.25%. The inflation has been projected to be 4% in the medium term with the assurance that it is under constant surveillance by the committee.
Investment has been estimated to pick up pace in the second half of FY18. RBI has opted for neutral stance. When doubts were expressed regarding it the Governor justified by saying that though the CPI has been lower than the estimates for Feb and March, there are uncertainties that prevail which could hike inflation. For instance the effects from the change of magnitude in MSP will be known for sure in the coming months, also volatility in crude oil prices can be a factor.
Increase from 6.6% to 7.4% has been gauged in the GDP growth for the FY18-19. The GDP for FY17-18 was at a low of 6.6% when compared to FY16-17. RBI has decided to switch from GVA to GDP mainly to stay in equilibrium with the international standards as GDP is used as an international benchmark when determining the performance of the country.
The capital goods production has registered 19 month high growth in Jan 2018. The industrial growth is expected to rebound. The trade deficit has widened in the month of Jan and Feb. The CPI inflation has eased to 4.4% and is estimated to further fall to 4.1%. The Housing Rent Allowance (HRA) will now be excluded will calculating the CPI to focus on the real underlying inflation. HRA currently contributed over 9.5% in CPI.
It is been expected that the aggregate demand will witness a rise and be strengthened in FY18. The pace of the economic progress will accelerate with investments and global demand acting as catalysts. Investment’s are been expected to grow rapidly with the mobilization of capital in the primary markets forming the base for expansion of its potential.
The surplus liquidity accumulated during the demonetization period is declining. Reverse repo rate, open market operations (OMO) or OMO sales will be utilized by RBI to absorb the surplus for attaining the objectivity of neutral system liquidity.
Post, Quarterly Tax Outflows the system liquidity has been almost neutral and has moved between deficit and surplus mode along with changes in the Government balance. The existing system liquidity changed to deficit during the fiscal year end 2017-18 which was declared to be expected by the RBI. To control the effects of short term repo contra RBI had net liquidity injection worth Rs. 58000 crore in March 2018.
WACR has been recorded to be lower than the policy rate on an average for the previous 6 months. RBI is anticipating the system liquidity to maintain moderate surplus mode in the first half of FY18. The changing liquidity will be used for judging the instruments required for transient and durable liquidity management.
RBI and decided to enable better risk management in Rupees interest rate swap market by extending its access to the non-residents. The decision has been taken by keeping banks in the centre of the picture. Another change into existence is the introduction of swaptions to allow better timing of interest rate management by using the interest rates swaps for banks and other entities.
This has been done to kick-start the activity in interest rate option which was introduced in the market in Dec 2016 but has been not performing as per expectations. Strips which were introduced in G-Sec markets in 2006 are another instrument which is not performing up to its potential. RBI has decided to review and adopt measures which will help boost the performance and exploit the full potential strips can provide for long term investment.
Here are the key notes from the Monetary Policy 2018:
• Minimum level of loan component has been proposed for better regulation in working capital amongst the large borrowers. Draft will be issued for feedback regarding the same.
• The implementation of Indian Accounting Standards amongst the Scheduled Commercial banks was to be brought into effect from April 2018 but has been deferred by a year.
• The payment systems will be mandatorily required to store the payment system data in India with a view of safety of the personal data of its customers. The regulation has to be complied with within 6 months.
• The reporting of the Foreign Direct Investment in India will be on a single online portal from June 30, 2018.
• RBI has formed an inter-departmental group which will be preparing a report on digital fiat currency and will be submitted by end-June 2018. This initiative is to overcome the hindrances faced by central bank due to the rapidly changing payment industry, the rising maintenance cost of fiat currency and the emergence of private digital tokens.
• RBI has ring fenced virtual currencies in India. Claiming it to be a catalyst for financial instability trading of virtual currencies has been declared illegal. Entities are forbidden from entering into such transactions and the one’s having an existing agreement have been allotted a time span of 3 months to dissolve them.
According to the assessment of RBI the economic activity has been exemplary in Q1 2018. Crude oil prices have been of unpredictable nature recently. Gold prices which touched two-month low mid-march have shown slight improvement due to the augmenting trade war. Equity markets have corrected and shed most of the gains in Feb-March. In currency markets the US Dollar which started on a positive note in March lost its gains in the latter part of the month. The fall in inflation to 4.4% was subject to decline of inflation in food and fuel.