Review of Fifth Bi-monthly Monetary Policy Statement 2017-18

Fifth Bi-monthly Monetary Policy Statement, 2017-18

MPC(Monetary policy committee) has kept the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.0 per cent reverse repo rate under the LAF remains at 5.75 per cent marginal standing facility (MSF) rate and the Bank Rate at 6.25 per cent. MPC voted 5:1 for this devision. MPC has maintained its neutral stance of monetary policy. 

Global Economy factor

1. US grown at the highest pace in the past three years in Q3 of 2017
2. The unemployment rate fell to 4.1 per cent in October, the lowest in the last 17 years.
3. In the Euro area, economic activity expanded, underpinned by accommodative monetary policy and strong job gains
4. The Japanese economy also continued to grow in Q3, largely supported by external demand, which helped compensate for the slowing of domestic consumption.

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Emerging Market factor

1. Services sector remained the main driver of growth in China
2. Falling World Trade Organisation (WTO) for Q4 indicates a loss of momentum in global trade due to declining export orders.

Crude oil is rising again

1. Touched a two-and-a-half-year high in early November on account of the Organisation of the Petroleum Exporting Countries’ (OPEC) efforts to rebalance the market.

Domestic Economy

1. On the domestic front ( Industry has shown higher growth; Agri and Services slow down)
2. the growth of real gross value added (GVA) accelerated sequentially in Q2 of 2017-18, after five consecutive quarters of deceleration
3. All the three sub-sectors of industry registered higher growth
4. in agriculture and allied activities slackened, reflecting the lower than expected kharif harvest
5. Activity in the services sector decelerated, mainly on account of slowdown in financial, insurance, real estate and professional services, and
6.  Falling Government Expenditure- public administration, defence and other services (PADO) fallen following the large front-loading of government expenditure in Q1

High Inflation

1. Retail inflation measured by year-on-year change in the consumer price index (CPI) recorded a seven-month high in October
2. Increase in growth and driven favourable base effects.
3. Food inflation was volatile in the last two months –
   1. declining sharply in September and bouncing back in October –
   2. due mainly to vegetables and fruits.

High Expected Inflation

1. Inflation expectations firming up

Surplus Liquidity

1. (increased due to monetization and foreign exchange management (buying foreign currency)
2. It has continued to decline during October and November.
3. RBI conducting OMO and MSS operation to manage liquidity. For short-term Reverse repo operation is being done
4. The weighted average call rate (WACR) traded 12 bps and 15 bps below the repo rate during October and November, respectively, as against 13 bps in September.

Changes in  MDR

1. rationalise the framework for Merchant Discount Rate (MDR) applicable on debit card transactions based on the category of merchants
2. revised MDR aims at achieving the twin objectives of increased usage of debit cards and ensuring sustainability of the business for the entities involved.

Refinancing ECB

1. Currently, Indian corporates are permitted to refinance their existing External Commercial Borrowings (ECBs) at a lower all-in-cost.
2. But The overseas branches/subsidiaries of Indian banks are, however, not permitted to extend such refinance
3. Now the overseas branches/subsidiaries of Indian banks to refinance ECBs of AAA-rated corporates as well as Navratna and Maharatna PSUs, by raising fresh ECBs. In this regard, the revised guidelines will be issued within a week.