Monetary Policy Review: February 2020

13 February 2020

Meeting the market’s expectations and in line with CARE Ratings’ expectations, the Monetary Policy Committee (MPC) maintained status quo in its sixth bi-monthly monetary policy review, retaining the repo rate unchanged at 5.15% while maintaining to stance at ‘accommodative’ citing the growth concerns while ensuring the inflation remains within the RBI’s target range of 4% (+/- 2%). All members voted in favour of the above decision.

The MPC stated that there still remains policy space for future actions. However, the outlook of inflation is uncertain with inflation expected to be 5-5.4% in H1-FY21. For H1-FY21, the economic growth projections have been revised downwards while the inflation projections have been revised upwards even surpassing RBI’s inflation target of 4%.

Key Highlights

RBI’s Assessment on global and domestic economy

A. Global scenario

 B. Indian economy

 RBI’s outlook on inflation and economic growth


 Owing to the various upside factors and increase in actual

inflation overshooting projections, the inflation projections

 have been revised upwards. In Q4 FY20 and H1 FY21 the

retail inflation is expected to surpass RBI’s inflation target at 4%.

In fact for Q4 it is expected to overshoot RBI’s upper band of 6%

of the inflation target. The factors guiding the inflation trajectory

in the future are listed below.

The MPC however points out that the inflation outlook remains highly uncertain on account of rise in non-food items, core CPI due to increase in telecom charges, freight charges, prices of drugs and pharma and new emission norms. Higher customs duties on some products would also affect core inflation.

Economic growth

Economic growth for FY21 has been pegged at 6% owing to expected recovery in the private consumption especially in the rural areas aided by improved rabi prospects and recent rise in food prices, easing global trade uncertainties encouraging exports and investment activity, progress in the monetary transmission, likely pick up in consumption and investment demand, rationalisation of personal income tax might support the domestic demand along with measures to boost rural and infra spending though a downside could emerge from outbreak of coronavirus in China impacting the tourist arrivals and global trade.

Developmental and regulatory policies

     Revision in Liquidity management framework  


The WACR will have to be monitored to gauge the extent of support to be received from the RBI. This can be through daily or term repo as and when required. The removal of the 1% NDTL limit would work well for banks which require more funding in times of liquidity shortage.

  Long Term Repo Operations (LTROs) for Improving Monetary Transmission


       Incentivising Bank Credit to Specific Sectors


      External Benchmarking of New Floating Rate Loans by Banks to Medium Enterprises


     Extension of One-time Restructuring Scheme for MSME advances till December 31, 2020

    Projects under Implementation in Commercial Real Estate sector


     This can be taken to be a logical corollary of steps being taken by the RBI against the initiatives taken by the government by setting up the Rs 25,000 cr fund to help developers. This will be beneficial for both banks and borrowers.

    CARE Ratings’ View

 The RBI has indicated that there could be rate cuts going ahead but would be data dependent. In the April policy going by the RBI’s forecast inflation would still be high at 5.45% and may not merit this move. It is more likely this would be in course of the year as inflation numbers become more favourable. The growth projection for next year is similar to what the Budget and Economic Survey have spoken of; but one may have to wait for the second half to see a more prominent push to growth. We could expect another 25-50 bps rate cut during the course of FY21 which however will be data dependent


Madan Sabnavis, Chief Economist

Dr. Rucha Ranadive, Economist


Rachna Gupta, Manager – Training


Tel: +91-22-67543674