RBI MONETARY POLICY UPDATE – October 2016

RBI governor Urjit Patel announced the fourth bi-monthly monetary policy for this fiscal year 2016-17 today. The main highlights are:

 

1. The Repo rate has been reduced by 0.25 per cent and is now 6.25 per cent. Cash reserve ratio (CRR) of scheduled banks is unchanged at 4.0 per cent.

Repo rate is the rate at which RBI lends money to banks.This may lead todecrease in interest rates on all loans by banks.

2. The MPC(monetary policy committee) consisting of six members including the RBI governor have taken a view that retail inflation measured by the consumer price index (CPI) will remain around 5 per cent by march 2017 with a slight upside risk. 
Higher inflation leads to higher cost of living expenses.

3.Economicgrowth is expected to quickenwith a normal monsoon raising
Agricultural growth and rural demand, as well as due to the urban consumption spending from the seventh pay commission’s award.

4.Liquidity conditions (i.e.:supply of money) were comfortablebetween July and September.

5.Outlook foragricultural activity has brightened considerably because the south west monsoon ended with a cumulative deficit ofonly 3 per cent belowthe long period average, with85 per cent of the country’s geographical area having received normal to excess rains.

6. Export growth was negative  between July and August 2016

7. Due to lower oil prices and gold imports the negative gap between exports and imports is lower at USD 10 billion between April and August 2016 as compared to the same period in 2015.

8. FDI (foreign direct investment) slowed between April and August 2016 as compared to the same period in 2015.

9. FII (foreign institutional investors) portfolio flow has increased after the Brexit vote as more foreign money flows in India since in many countries yields are negative.

10. The level of foreign exchange reserves rose to USD372 billion by September 30, 2016  which is an all-time high

11. GDP growth projection is likely to be @ 7.6% for FY16-17 using the GVA (gross value added)method 
Gross value added (GVA) is the measure of the value of all goods and services produced in the country.

12. RBI will consider growth prospects and CPI inflation data while deciding the future interest rate movements.

prashant.mehta@acm.co.in

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