Decision/ Observation

Kept Policy rates unchanged to previous level Repo rate = 6.5% Reverse Repo rate = 6.25% MSF rate = Bank Rate = 6.75%

LAF corridor = 0.25%

Policy Rate Corridor = 0.5%

Stance -> Calibrated Tightening. GDP growth projection retained at 7.4% as was on August (3rd) Monetary Policy. Lowered inflation projection for rest of the year as well as for Q1FY20. View on investment Cycle -> Expected to increase because Improvement in Capacity utilization Increase in FDI inflows Increased financial resources to the corporate sector. (IBC is one of the reason)

Rational:

Liquidity Crunch: Money/debt market crises due to IL&FSs default on debt caused this. To ease out this liquidity crunch RBI has initiated liquidity easing measures like aggressive Open Market purchase of bonds. Through rate cut RBI tried to ease out the liquidity crisis.

Comfort on inflation: Good Agriculture output eased the inflation. Further customs duty cut on crude oil and taxes cut on petroleum products by some states also provided some comfort to RBI on the inflation front.

See also: Difference between Repo rate, reverse repo, and bank rate

Criticism:

Falling Rupee value: Rupee is already on its historical low value because of numerous reasons. One among them is reviving USA economy (Indicating by USA’s GDP and Job numbers). Had the RBI increase the policy rate, it would attract the international investor to invest in India. This would increase the dollar inflow in India. This could have improved the value of Rupee.

See also: Impact of falling exchange rate on Indian economy

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Risk:

Tighten global and domestic financial conditions -> could lead to less international investment -> less inflow of dollar -> Rupee depreciate Rising crude oil prices -> higher fuel cost -> inflation increase Depreciation of the rupee -> Costly import -> inflation increase Slowing down of global trade and the escalating tariff war -> Less export

However, Depreciation of rupee can push the export and counter the effects of slowing down of global trade to some extent.

Note:

This article belongs to current affairs for UPSC IAS , UGC NET Economics and RBI Grade B preparation (in economics and banking). Economics is a major part of UPSC IAS syllabus, and you often find questions in UPSC prelims as well as UPSC Main GS 3. Monetary policy is also a most important topic in RBI Grade B preparation. You will find questions in RBI Grade B general awareness paper as well as in RBI Grade B ESI paper. You may be asked to write an essay on the Indian economy, and knowledge of Monetary policy followed by RBI will come in handy.

See also: Best youtube channel for UPSC and RBI Grade B preparation