All you need to know about RBI monetary policy review

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RBI held the Monetary Policy Review on Dec 5

The Reserve Bank of India (RBI)—at its monetary policy review meeting on Wednesday—kept its repo rate unchanged, citing benign inflation outlook and improved investment activity.

In a move which will affect the home loan rates and auto loan rates, the RBI has mandated the use of external benchmarks for their floating rate loans instead of the present system of internal benchmarks.

The new norms for pricing of retail loans, including home and auto loans, will be applicable on new loans extended from April 1.

The external benchmarks are one of the following: RBI’s policy repo rate, Government of India’s 91 days Treasury Bill yield produced by the Financial Benchmarks India Private Ltd (FBIL), or Government of India 182 days Treasury Bill yield produced by the FBIL, or any other benchmark market interest rate produced by the FBIL.

Banks at their discretion can charge a margin or spread over the benchmark rate ‘but it will remain unchanged through the life of the loan, unless the borrower’s credit assessment undergoes a substantial change and as agreed upon in the loan contract,’ the RBI said.

A committee headed by Janak Raj had recommended the use of external benchmarks by banks for their floating rate loans instead of the present system of internal benchmarks – Prime Lending Rate (PLR), Benchmark Prime Lending Rate (BPLR), Base Rate, and Marginal Cost of Funds based Lending Rate (MCLR).

The repo rate is the interest rate at which RBI lends money to the banks for the short term.

Here is all you need to know about the meeting:

  • The six-member monetary policy committee (MPC) voted unanimously to keep the repo rate at 6.5%, in line with the market expectations.
  • Inflation projection was lowered sharply to 2.7%-3.2% from 3.9%-4.5% for the second half of 2018-19

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  • The reason for lower inflation outlook was a fall in food inflation, crude prices and appreciating rupee. The rupee, at present, is nearly 6% off its record lows and the recent fall in global crude oil prices has also eased worries over India’s current account deficit.
  • Inflation is expected to rise to 3.8-4.2% in the first half of 2019-20.
  • The panel retained its GDP growth estimate for the current year at 7.4%, but lowered projections for next fiscal to 7.5%.
  • The slowdown in the GDP in the last quarter was due to moderation in private consumption and a large drag from net exports.

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