In the last monetary policy of this fiscal 2019-20, RBI kept policy rates unchanged for the second time in a row as under:
- Repo Rate i.e. rate at which RBI lends to banks remains at 5.15%.
- Reverse Repo Rate i.e. rate at which banks park their excess liquidity with RBI, which currently is 0.25% lower than Repo Rate, remains at 4.90%.
However, RBI announced measures to reduce the cost of funds to the banks and increase liquidity as under:
- RBI to provide cheap long-term financing (1 year to 3 years) to banks up to Rs. 1 Lakh Crore.
- The cash reserve requirement (CRR), waived on deposits used to provide retail loans between Jan. 21st, 2020 and July 31st, 2020. CRR is the fraction of deposits that banks must keep in reserve as cash or deposit with RBI.
- Loans to medium size enterprises to be bench marked to RBI’s Repo Rate.
Retail inflation surged to 5 years high at 7.4% in December 2019, largely led by a spike in food prices. RBI said that inflation outlook remains highly uncertain and needs to be carefully monitored particularly with further passing on of revision in mobile charges, an increase in the price of drugs and new emission norms have their impact. The combination of these factors may keep this inflation elevated in the short-term. Accordingly, the CPI inflation projection was raised to 6.5% for Q4 2019-20; 5.0% – 5.4% for 1st half of 2020-21 and 3.2% for Q3 of 2020-21.
Growth for 2020-21 was forecast at 6% as monetary transmission in terms of reduction in lending rates and an increase in liquidity are expected to spur both consumption and investment. RBI warned that downside risks of global growth have increased in the context of novel corona-virus, the full impact of which is still uncertain.