Will RBI Cut Rates in its Last Monetary Policy Meet for FY20? Here’s What You Should Know

After the Union Budget 2020 failed to meet market expectations of reviving growth and generating jobs in the country, the focus has now shifted to the Reserve Bank of India’s (RBI’s) last monetary policy statement for fiscal 2019-20 that will be released on February 6.

The bi-monthly meeting of the six-member Monetary Policy Committee (MPC) begins today and the panel will announce its decision on interest rates by noon on Thursday. In its previous review in December, RBI had left the key repo rate unchanged.

Here’s all you should know about the sixth and last monetary policy meeting of 2019-20:

-How does monetary policy work? Monetary policy basically manages liquidity in the economy to control inflation rate. If RBI reduces repo rate, lending rates go down, thereby raising volumes of loans and money supply. This can help in boosting economic growth.

On the other hand, by raising repo rate, RBI can reduce liquidity in the economy as loans become more expensive, thereby reducing inflation.

- What are the current benchmark rates? Repo rate, or the rate at which RBI lends money to the commercial banks, currently stands at 5.15%. Whereas, reverse repo rate, or the rate at which commercial banks park their money with the central bank, is currently 4.9%.

CRR, or cash reserve ratio, currently stands at 4%. CRR is a requirement set by RBI for domestic banks to determine the minimum amount of cash reserve they need to keep to meet payment obligations. It is calculated as the percentage of the deposits that should be kept aside by banks.

-What are markets expecting? Markets are widely expecting another status quo by RBI as retail inflation peaked in December to a five-year high of 7.3%. The MPC has, anyways, cut rates by 135 basis points over five straight meetings last year to boost growth and may wait for the full effect of these cuts to be passed on to consumers before reducing rates again.

Experts say that RBI is now forecast to next cut rates by 25 basis points to 4.9% only in the October 2020 meeting after which it may resume cutting rates.