The First Bi-Monthly Policy Statement for fiscal 2017-18 was released by the Reserve Bank of India (RBI) on April 6, 2017. The Repo Rate under the Liquidity Adjustment Facility (LAF) was kept unchanged at 6.25%. As a consequence, the reverse repo rate remains pegged at 6%, the Bank Rate and Marginal Standing Facility (MSF) Rate are both unchanged at 5%.

Refresh Your Knowledge:
Repo Rate: The rate at which the RBI lends to commercial banks.
Reverse Repo Rate: The rate at which commercial banks place their surplus funds with the RBI.
MSF: A facility for banks to borrow more funds beyond what they have already borrowed from the RBI through the repo facility.
Bank Rate: The rate at which the RBI lends to commercial banks.
Cash Reserve Ratio (CRR): A percentage of total funds held by commercial banks that has to be parked with the RBI.
Statutory Liquidity Ratio (SLR): A percentage of Net Demand & Time Liabilities (NDTL) held by commercial banks that has to be invested by the banks in gold, treasury bills, unencumbered central & state government securities and government guaranteed bonds.

Therefore, the current rates from April 6, 2017 are as follows:

Repo Rate: 6.25%
Reverse Repo Rate: 6.00%
MSF Rate : 6.50%
Bank Rate: 6.50%
CRR: 4.00%
SLR: 20.50%

In short, the RBI has not tinkered with the Repo Rate this time. The Reverse Repo Rate has been adjusted to 6%. Known for its cautious approach, the RBI aims at achieving a 4% rate with respect to the Consumer Price Index (CPI). This is its medium-term target. There could be a variance of plus or minus 2% which is expected. In addition, the central bank has also to squeeze out the excess liquidity in the economy.

Global radar: RBI keeps watch

The RBI keeps a continuous tab on major international economies throughout the year. As an aspiring banking professional, it is extremely important for you to understand that the policies followed in India cannot be made on a standalone basis. India is no longer isolated and insulated from the economic vagaries of developed and emerging economies. India’s economic policies have to be in tandem with global trends. For this purpose, bankers have to be aware and alert of economic developments across the world. How quickly you rise in your career as a remarkable banking professional depends on how updated you are vis-à-vis global economies.

The United States of America

The RBI has observed that there is a semblance of recovery in the United States of America, in the first three months of 2017. Parameters measuring indexes of labour markets, industrial production, and retail sales indicate recovering trends.


In Europe, the RBI has noted that employment rate is rising. Consumer confidence has increased. The barometer of growth, i.e. Manufacturing Purchase Manager’s Index (PMI) was at a six-year high in March 2017.


Even in the gloomy Japanese economy, there has been a fall in unemployment numbers. Japanese exports have been steadily increasing. This could be aided by the depreciation of the value of the Yen (Japanese currency). The RBI has noted that despite this hope of revival in the Japanese economy, there is still a danger of deflation hovering over that country.


On the other hand, the RBI observed strong growth indications from economic parameters emerging from China. Business is booming in China. Credit growth (i.e. the demand for funds by business enterprises from lending institutions) is rising. This indicates that businesses are craving for more money as they are struggling to cater to the demands of their markets in terms of supply of goods and services. The real estate market in China is doing extremely well. Such a buoyant environment is also fuelled by positive and supportive policies laid out by the Chinese government. Notwithstanding all the bullishness emanating from China, the RBI also took into account, the concerns on financial stability and capital outflows in China.


Brazil, on the other hand, is on a recovery tangent. The Brazilian Government is taking major steps to revive their economy from the abyss of recession. However, the economy is fragile at present, despite a gradual rise in commodity prices.


Russia is another major economy recovering from an economic setback in the last two years. A nascent recovery in its economy has been observed from PMI data. The Russian economy was dealt a double blow a couple of years ago when oil prices crashed as well as sanctions were placed against it by Western countries for political reasons.  Presently, a gradual pickup in exports from Russia and rising oil prices, have given a ray of hope to the one-time superpower. The RBI expects Russia to clock positive rates of growth in 2017.

Inflationary trends

Growth is invariably accompanied by inflation. Exports are rising strongly in several Advanced Economies (AE) as well as Emerging Market Economies (EME). The RBI has observed that inflationary trends are evident in the above advanced economies. Even countries clubbed under EME like Turkey and South Africa have fallen victims to the pressures of inflation.

Hawk-eyed approach

The RBI keeps a hawk-eyed watch on international equity and currency markets all the time. It notes that while mixed trends have been seen in EMEs, the AEs have been performing stronger in equities owing to geopolitical events and country-specific factors.

India: CSO data allays fears

Having analysed the international scenario, it is understood that the RBI mandates policies fit for the Indian scenario. The Central Statistical Organisation (CSO) provides economic data on the state of the economy periodically. The CSO has revised its estimate of India’s real GVA growth rate to 6.70%, down from the earlier estimate of 7%.

Ray of hope

After two consecutive years of poor growth rates, agriculture has shown robust surge this year. However, the laggards have been the industrial production and the services sector.

Food blockbuster

The RBI is positive in its outlook, considering that food production is at an all-time high (272 million tons). The kharif season procurement seems to have boosted this number, which was earlier hovering close to our national buffer stock. The output of pulses has been at 20 lakh tons, which has helped in providing food security. Consequently, it is expected that market prices of food grains will fall owing to the bumper production.

Tepid industry

Industrial growth in India has been tepid. Despite an improvement in capital goods production, consumer non-durables, investment, and rural consumption show a discouraging performance. Based on the PMI data, the RBI expects overall business sentiment to improve in the first quarter of this fiscal (April-June 2017. Fiscal means financial year, which begins from April and ends in March of the subsequent year). However, the RBI has raised a caveat (i.e. warning or caution) that if production capacities of enterprises remain under-utilised, then there could be a drop in fresh capital investment. This could eventually bring down growth rates if not attended to.

Services look up

The RBI also monitors the services sector in India closely. Parameters like railway traffic, telephone subscribers, foreign tourist arrivals, passenger and commercial vehicle sales are observed to derive the growth trajectory. The RBI observed that after previous three months of depression in the services industry, the PMI data for February and March 2017 have indicated that there is an ascent in the growth rate of this industry.

CPI raises its hood

Retail inflation, as measured by the Consumer Price Index (CPI) has been hardening over the quarter. This is owing to rise in prices of sugar, fruits, meat, fish, milk and processed foods. Since a major chunk of Liquefied Petroleum Gas (LPG) is imported, prices of this food lifeline has risen in tandem with rising international fuel prices. On the other hand, the Government has embarked upon a structured programme to reduce subsidy on kerosene. In other words, a bulk of the cost of imported kerosene was earlier borne by the government. So the consumers of kerosene had to pay only a part of the cost. This is a social measure undertaken by the government to ensure that people below the poverty line, who majorly use kerosene as a cooking fuel, are not impacted by the volatility of international oil prices. This measure is now slowly being withdrawn by the government. The impact of this will be that the consumer will have to pay a higher price for the fuel. As a counter measure, the Government encourages the use of LPG and Bio Fuel as cooking media, hoping to wean away the masses from its reliance on kerosene.

Corporate conundrum

In the corporate sector, the RBI notes that there is a pressure on corporate profits. This is due to increase in costs. In order to maintain profit margins, the RBI expects corporates to raise prices since they would not be able to control input costs. Exports have been growing, especially engineering goods, petroleum products, iron ore, rice, and chemicals. Overall, the current account deficit is expected to remain at less than 1% of Gross Domestic Product (GDP). Foreign Portfolio Investments (FPI) have shown growing trends in February and March 2017. According to the RBI, this is due to domestic economic and political conditions in India. As a consequence, this is building up the confidence of overseas investors in India’s growth story.

RBI leads the way forward

For the coming quarter, the RBI has taken the following outlook, based on the above developments:

  • CPI Inflation is expected to be below 5% in 2017-18.
  • The onset of southwest monsoon season is uncertain owing to the expected El-Nino event around July-August. Food inflation could raise its ugly head at this time.
  • Implementation of the payouts of the 7th Central Pay Commission recommendations could lead to a rise in CPI inflation.
  • Implementation of GST is also expected to lead to a rise in CPI inflation.
  • The government deficit is expected to worsen owing to farm loan waivers.
  • Geopolitical risks, especially with the recent turbulence in Syria could induce global financial volatility.
  • Higher food production is expected to mitigate food price volatility.
  • GVA growth is expected to strengthen to 7.40% in 2017-18 as compared to 6.70% in 2016-17.
  • The Monetary Policy Committee (MPC) prefers to wait and watch the global and domestic developments before embarking on a control-based stance.
  • The RBI will endeavour to resolve the grim situation of stressed bank assets firmly and simultaneously provide a congenial atmosphere for the revival of bank credit.

So, in conclusion, we can say that the RBI has moved along expected lines. It remains to be seen how well the central bank tackles the risks mentioned above. With Governor Urjit Patel’s fourth policy review statement since he took charge, his reputation as an astute banker and far-sighted professional gains currency.

Watch this space for the next policy review expected on June 6, 2017.


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