MPC-April 2018

Highlights:
Repo rate unchanged at 6%

Reverse repo rate unchanged at 5.75%

MSF and bank rate unchanged at 6.25%

Objective: to keep inflation (CPI) within 4% +/- 2% range

Assessment of environment:
FACTORS EXPLANATION
The headline Inflation post Feb-2018, eased to 4.4% from against 5.2% in
Inflation overview
December,2017.
The fall in headline Inflation was majorly due to the seasonal drop in vegetable
prices: 3.4% in February as compared to 4.6% in January. Though fuel inflation
Rationale was highest among all components, at 6.8% in the same period, CPI inflation
excluding fuel and food , stood constant since December 2018, at 5.2%, partially
due to the HRA allowances under the 7th pay commission.
The proposed link between MSPs for kharif crops with 1.5 times the cost of
Challenges production might drive the inflation up. Secondly the volatility in crude oil
and prices would create uncertainty in the inflation scenario. Further, the Industrial
Concerns Outlook Survey (IOS) of the RBI suggests raising the input prices might be
passed on to consumers and would lead to higher CPI inflation.
The estimated growth in the last quarter of 2017 was at 6.6% as compared to
GDP Overview
7.1% in 2016-17.
Capacity utilization, which tracks investment trends, had started to improve
and was at the highest level (at 74.3%) since Q2 2014-15. Private consumption
growth – whose contribution to GDP growth in 2017-18 was 68 per cent –
moderated in the second half. Goods and services tax (GST) implementation
had an adverse, even if transient, effect on urban consumption through loss of
output and employment in the labour-intensive unorganised sector.
Rationale Government expenditure provided sustained support to aggregate demand,
with a pick-up in pace in the second half. Gross fixed capital formation turned
around in Q2 and accelerated in the second half – markedly so in Q3 – reflecting
the first signs of a sustained expansion in capital goods production and a
modest revival of construction activity. Net exports dragged down aggregate
demand in 2017-18 due to a surge in imports and deceleration in exports in Q3,
the latter being driven in part by GST-related working capital disruptions.
Challenges
Internal trade shock from MSPs would drive the inflation up which would
and
Concerns
impact the GDP growth.

Fiscal Slippage by the Centre from the fiscal consolidation path and its likely adverse
deficit Overview impact on the headline inflation and the cost of borrowing are often raised as
slippage a major concern.
 The combined (Centre and all States together) fiscal deficit matters for the
headline inflation. By then, 26 states had presented their budgets and their
Rationale combined budgeted fiscal deficit was estimated to be 2.6 per cent of GDP. To a
large extent, the fiscal slippage of the Centre was compensated by the fiscal
discipline shown by the States.
As per expectations about the tax revenues exceeding the revised estimates for
the year 2017-18, reducing the estimate of the fiscal slippage by the Centre, if
Concerns the buoyancy persists, could substantially reduce the magnitude of the fiscal
slippage next year. On the other hand, the slippage could occur for various
reasons including the forthcoming elections in States and the Centre.
Negative output gap, trade war possibility, volatility in oil and gas prices,
Overview
concerns regarding adequate monsoon.
Outstanding bank credit had touched Rs 82.06 lakh crore in Jan 2018,
External recording an y-o-y growth of 111% since February,2016, showing that the
factors credit offtake was picking up and thus closing of output gap. Trade
Rationale protectionism and volatile oil and gas prices would , on the other hand, affect
the recovering domestic economy.

Liquidity in the system moved between surplus and deficit during February-
Overview
March 2018
From a daily net average surplus of Rs 272 billion during February 1-11, 2018,
liquidity moved into deficit during February 12-March 1, reflecting a slowdown
in government spending and large tax collections. After turning into surplus
Liquidity during March 2-15, the system moved into deficit again during March 16-22
Rationale mainly on account of quarterly advance tax outflows. In mid-March, additional
liquidity of Rs 1 trillion got released into the system through redemption of
Treasury Bills issued under the Market Stabilisation Scheme (MSS) in April and
May 2017. On the whole, the Reserve Bank injected Rs 60 billion and Rs 213
billion on a net daily average basis in February and March, respectively.
MPC-Feb 2019
Highlights:
Repo rate cut by 25 basis points from 6.5 % to 6.25%.

Reverse repo rate still adjusted at 6.00%

MSF and bank rate unchanged at 6.50%

Objective: to keep inflation (CPI) within 4% +/- 2% range

Assessment of environment:
FACTORS EXPLANATION
Headline inflation softened to 2.2 per cent in December from 2.3 per cent in
Inflation overview
November and 3.4 per cent in October, in 2018
It was primarily due to a drop in food inflation from -0.1 per cent in October to
-1.7 per cent in November and -1.5 per cent in December. Inflation excluding
food and fuel fell from 6.2 per cent in October to 5.7 per cent and 5.6 per cent
in November and December, respectively. Headline inflation excluding food
and fuel has moderated somewhat due to a fall in crude oil prices and complete
waning of central government employees’ House Rent Allowance (HRA) effects;
Rationale
nevertheless, it remains at a highly elevated level, ranging between 5.6-6.2%
over the past three prints. RBI’s projections for Q3 FY 19-20 headline inflation
stand at 3.9%.CPI inflation excluding food and fuel decelerated to 5.6 per cent
in December from 6.2 per cent in October, dragged down mainly by the
moderation in the prices of petrol and diesel in line with the decline in
international petroleum product prices.
CPI inflation for 2018-19 was projected in the range of 2.7-3.2 per cent in
H2:2018-19 and 3.8-4.2 per cent in H1:2019-20, with risks tilted to the upside.
The actual inflation outcome at 2.6 per cent in Q3:2018-19 was marginally
Challenges lower than the projection. Five constituents of the food group – vegetables,
and sugar, pulses, eggs and fruits, accounting for about 30 per cent of food group –
Concerns were in deflation in December. Inflation in the fuel and light group fell from 8.5
per cent in October to 4.5 per cent in December, pulled down by a sharp decline
in the prices of liquefied petroleum gas (LPG), reflecting softening of
international petroleum product prices.
GDP growth for 2019-20 is projected at 7.4 per cent – in the range of 7.2-7.4
GDP Overview
per cent in H1, and 7.5 per cent in Q3 – with risks evenly balanced.
On January 7, 2019, the Central Statistics Office (CSO) released the first advance
estimates (FAE) for 2018-19, placing India’s real gross domestic product (GDP)
growth at 7.2 per cent – the same level as in 2017-18. It featured an
acceleration in gross fixed capital formation (GFCF) and a slowdown in
Rationale
consumption expenditure and also a dip in net exports. While non-food bank
credit (NFBC) growth has declined marginally in the last few months, it
continues to be high (14.6% on January 18, 2019). Credit growth to Non-
Banking Financial Companies (NBFCs) was also high at 55.1% in December 2018
 according to RBI data. While non-food bank credit (NFBC) growth has declined
marginally in the last few months, it continues to be high (14.6% on January 18,
2019). Credit growth to Non-Banking Financial Companies (NBFCs) was also
high at 55.1% in December 2018 according to RBI data.
the IIP fell to a 17 month low at 0.5% Y-o-Y, although this reflects the somewhat
Challenges higher volatility typical of the October-December window because of festive
and holidays. Consumer durable goods production also contracted by 0.9 per cent
Concerns in November 2018. Growth in a number of economies has slowed this year due
to trade tensions and the associated uncertainty.
Fiscal The slippage during 2019-20 without additional resource mobilization (since it
deficit Overview was an interim budget) turns out to be less than 20 bps from the fiscal
slippage consolidation path
In the regular budget to be presented after the general election, such a minor
gap may be covered with additional resource mobilization. It may not,
therefore, have any significant inflationary impact on the economy and a very
Rationale
limited impact on the real interest rates in the system. With the institutional
reforms in the recent past, significant fiscal slippage from the states side taking
place is also not very likely.
Overview Fluctuating global Oil and Gas prices, Trade tensions, turbulent global economy
Oil prices have been volatile in 2018. In May, the prices hit as high as
$80/barrel and in September , the prices dipped below $50/b. The decision of
OPEC to bring the prices to $70/b would lead to a a cut of 12.mn barrels per
External
factors
day. The US economy is predicted to grow at 2.1% , lower than 3% in 2018
Rationale and its core inflation is to rise at a higher, 2% in 2019-20. China’s GDP growth
has been decelerating and is expected to be 6.2% in 2019. The Eurozone is
facing troubles in manufacturing and the uncertainties over Brexit, leading to
a decline of 0.1% in growth, estimated to be 1.3% in 2019.

Liquidity injected under the LAF was ₹996 billion in December on an average
Overview
daily net basis, and ₹329 billion in January
The weighted average call rate (WACR) traded below the policy repo rate on 12
out of 20 days in December, all 23 days in January and 4 days in February (up
to February 6). The WACR was below the repo rate on an average by 4 basis
points in December and 11 basis points each in January and February. Currency
Liquidity
in circulation expanded sharply during December and January. The liquidity
Rationale
needs arising out of expansion in currency were met by the Reserve Bank
through injection of durable liquidity amounting to ₹500 billion each in
December and January through purchases under open market operations
(OMOs). Accordingly, total durable liquidity injected through OMOs has
aggregated ₹2.36 trillion during 2018-19 so far