RBI monetary policy 2018: 10 Key highlights

RBI monetary policy 2018: The Reserve Bank of India (RBI) announced its third bi-monthly monetary policy review statement today in which it raised interest rates by 25 bps to 6.50%. The RBI resorted to this move to strike a balance between rising inflationary pressures and still recovering growth. RBI governor Urjit Patel along with six-member MPC have been meeting for past 3 days to present the outcome of India’s monetary policy today. 
 
The key highlights of the policy statement are:
 
1. RBI increases the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 6.5 per cent.
 
2. The reverse repo rate under the LAF stands adjusted to 6.25 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 6.75 per cent.
 
3. The decision of the MPC is consistent with the 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. 
 
4. South-west monsoon that has been recovering after a brief spell of deficiency in the second half of June. The cumulative rainfall up to July 31, 2018 was 6 per cent below the long-period average.
 
5. Industrial growth, measured by the index of industrial production (IIP), strengthened in April-May 2018 on a y-o-y basis. This was driven mainly by a significant turnaround in the production of capital goods and consumer durables. 
 
6. Growth in the infrastructure/construction sector accelerated sharply, reflecting the government’s thrust on national highways and rural housing, while the growth of consumer non-durables decelerated significantly. 
 
7. The assessment based on the Reserve Bank’s business expectations index (BEI) for Q1:2018-19 remained optimistic notwithstanding some softening in production, order books and exports. 
 
8.Several high-frequency indicators of services activity increased at a faster pace in May-June. Tractor and two-wheeler sales growth accelerated significantly, suggesting strong rural demand. 
 
9. Retail inflation, measured by the year-on-year change in the CPI, rose from 4.9 per cent in May to 5 per cent in June, driven by an uptick in inflation in fuel and in items other than food and fuel even as food inflation remained muted due to lower than usual seasonal uptick in prices of fruits and vegetables in summer months.

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10. The June round of the Reserve Bank’s survey of households reported a further uptick of 20 basis points in inflation expectations for both three-month and one-year ahead horizons as compared with the last round.