Third Bi Monthly Monetary Policy 2019-20 | RBI Updates

Third Bi Monthly Monetary Policy 2019-20: Dear Friends, Reserve Bank of India has released the Third Bi-Monthly Monetary Policy which was important Banking Awareness Topic in all competitive exams. Candidates can check and use it for your preparation.

Third Bi-Monthly Monetary Policy

Monetary policy:

Monetary policy is an economic policy that manages the size and growth rate of the money supply in an economy.

In India, monetary policy of the Reserve Bank of India is mainly aimed at managing the quantity of money in order to meet the requirements of different sectors of the economy and also to increase the pace of economic growth.

The RBI implements the monetary policy through

  1. open market operations,
  2. bank rate policy
  3. reserve system
  4. credit control policy
  5. Moral persuasion.

Using any of these instruments will lead to changes in the interest rate, or the money supply in the economy.

Liquidity is important for an economy to spur growth. To maintain liquidity, the RBI is dependent on the monetary policy. By purchasing bonds through open market operations, the RBI introduces money in the system and reduces the interest rate.

 Third Bi- monthly monetary policy:

  • While the domestic slowdown and benign inflation have raised expectations of a steep cut by the RBI, the escalating US-China trade war and weakening of the rupee could temper the central bank’s action.
  • Rising concerns on a growth slowdown in the domestic market and Favorable inflation trend have raised market expectations of a sharp cut in repo rate by the RBI, in the past month.
  • After cutting its policy rate by 25 basis points and changing its stance from neutral to accommodative in the June policy, the RBI threw open the possibility of more rate cuts.
  • The Monetary Policy Committee of the Reserve Bank of India (RBI) cut the repo rate by 35 bps to 5.40 per cent third bi-monthly Monetary Policy Statement for 2019-20.
  • The reverse repo rate under the LAF stands revised to 5.15 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 5.65 per cent. This is the fourth rate cut by the RBI so far in this calendar year. The RBI maintained its policy stance as accommodative similar to the one in the last policy. With the US Federal Reserve already slashing rates, the probability of another rate cut in the calendar year had gained momentum.
  • The RBI joins global central banks in reducing the cost of funds to beat an economic slowdown partly induced by trade wars and slowing demand in domestic economies. The US Federal Reserve reduced rates by a quarter point recently, but dampened expectations by highlighting that this was more a mid-cycle adjustment rather than the beginning of a lower-rate cycle. The central banks of countries such as Thailand and New Zealand have also cut interest rates.
  • With inflation expected to remain benign amid slowing consumption and investment growth, which threatens to further slow down economic growth, MPC’s focus has now fully shifted from combating inflation to boosting aggregate demand. The central bank has traditionally balanced its policy narrative between growth imperatives and inflation management, but the policy focus now seems solely reassigned to minimizing the negative output gap. The unconventional rate cut and the unchanged stance may also signal the central bank’s willingness to make room for future rate cuts.
  • This comes on top of a system flush with liquidity, driving even the weighted average call money rate below the policy rate; ideally, both should be broadly aligned. In these times of uncertainty—especially in global trade, geopolitics and currency markets.

Monetary Policy Rates

Policy Rate 3rd Bi monthly 2nd Bi monthly
Repo rate 5.40% 5.75%
Reverse Repo rate 5.15% 5.5%
Marginal standing facility 5.65% 6%
Bank Rate 5.65% 6%
Cash Reserve Ratio 4% 4%
Statutory Liquidity ratio 18.75% 19%

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