The RBI Governor also said that the central bank will issue a new circular on non-performing assets (NPAs) or bad loans in the next two to three days.
The Reserve Bank of India (RBI) on June 6 lowered the repo rate — its key lending rate— by 25 basis points to 5.75 percent, flagged concerns about weakening growth, but changed the stance to "accommodative" from "neutral", signalling higher chances of more cuts in the coming months if inflation persisted within tolerable limits.
The lower repo rate—the rate at which banks borrow from the RBI— has raised hopes of bringing down EMIs for the millions of home loan borrowers as well cut capital raising costs for corporates, with banks expected to pass on the reduced rates by slashing lending rates for its customers.
This was the third repo rate cut in as many policies since February 2019.
The six-member Monetary Policy Committee (MPC), headed by RBI Governor Shaktikanta Das, however, sounded a note of caution on the broader economy's prospects, amid sluggish investment activity, weak household spending and an uncertain external environment, buffeted by mounting US-China trade tensions.
"A sharp slowdown in investment activity, along with a continuing moderation in private consumption growth is a matter of concern," the policy statement said.
Das told journalists after presenting the policy that the RBI was closely monitoring the developments in non-banking finance companies (NBFCs) and housing finance companies (HFCs).
The central bank will not hesitate to take steps to ensure stability, and RBI was committed to a robust, well-functioning NBFC sector, he said.
Das also said that the central bank will issue a new circular on non-performing assets (NPAs) or bad loans in the next two to three days.
Banks and corporate borrowers are keenly waiting for the revised circular for resolution of stressed assets after its February 12, 2018 norms were struck down by the Supreme Court in April.
The Supreme Court had that circular that had set strict norms for bad loan resolution. The RBI circular directed banks to refer defaulters to bankruptcy courts if they were unable to find a resolution plan within 180 days for stressed accounts where the outstanding amount was more than Rs 2,000 crore.
The apex court order had eased concerns of some debt-laden companies, who say that they haven't been able repay loans because of unforeseen business reasons.
Das said that RBI was monitoring banks' monetary transmission, the extent to which lenders have passed on lower repo rates to its customers.
Transmission of the cumulative reduction of 50 basis points in the policy repo rate in February and April 2019 was 21 basis points to the weighted average lending rate (WALR) on fresh rupee loans.
One basis point is one hundredth of a percentage point.
"However, the WALR on outstanding rupee loans increased by 4 bps as the past loans continue to be priced at high rates. Interest rates on longer tenor money market instruments remained broadly aligned with the overnight WACR, reflecting near full transmission of the reduction in policy rate," the central bank said.
A rate hike in the near future was a clearly off the table, and Das obliquely hinted at even lower interest rates, as focus appears to have shifted more towards engineering a quick turnaround in the broader economy by boosting consumption and investment.
"There is scope for the MPC to accommodate growth concerns by supporting efforts to boost aggregate demand, and in particularly, reinvigorate private investment activity, while remaining consistent with its flexible inflation targetting mandate," the statement said.
India's gross domestic product (GDP) grew 5.8 percent in January-March, official data released on May 31 showed, confirming fears of a slowdown, as the new government assumed office amid expectations of a wide ranging policy impetus to turnaround the economy that is nursing multiple pain points.
"Real" or inflation-adjusted GDP grew 6.8 percent in 2018-19, lower than previous year's 7.2 percent. India recorded its annual lowest GDP growth since 2013-14, and the lowest quarterly growth since April-June 2018, national income data released by the Central Statistics Office (CSO) showed.
In light of the new data, the RBI has lowered its 2019-20 growth projections to 7 percent, from 7.2 percent estimated in April. The central bank expects India's GDP to grow at 6.4-6.7 percent in April-September and 7.2-7.5 percent in October-March 2019-20.
Slowdown signs were visible since last year, with GDP growing 6.6% in October-December 2018. The national income data have reinforced deceleration signs that were emanating from a slew of shop-end data, such as car and consumer goods sales, often seen as proxy indicators to gauge trends in household spending.
Fourth quarter corporate results have also shown a slowdown in profit growth across sectors. People are buying fewer cars and domestic sales, production and export of automobiles reflected this deceleration. Similarly, growth in FMCG companies have also slowed down considerably in recent quarters, mirrored in slowing sales of consumer staples, such as biscuits, soaps, oil.
One of the first tasks of the new government will be to usher in policies to boost people's spending, buoy demand. This, in turn, will prompt companies to investment more, add capacities to meet growing demand, and eventually, hire more people. The new government will present its first central budget in the first fortnight of July 2019, amid heightened expectations that it will offer tax breaks to individuals and households, giving them more money to spend and save.
"Weak global demand due to escalation in trade wars may further impact India’s exports and investment activity. Further, private consumption, especially in rural areas, has weakened in recent months. However, on the positive side, political stability, high capacity utilisation, the uptick in business expectations in Q2 (July-September), buoyant stock market conditions and higher financial flows to the commercial sector augur well for investment activity," RBI said.
The RBI also revised its inflation projections to 3-3.1 percent in June-September and 3.4-3.7 percent in October-March from the earlier projections of 2.9-3 percent and the 3.5-3.8 percent respectively.All members of the MPC — Chetan Ghate, Pami Dua, Ravindra H. Dholakia, Michael Debabrata Patra, Viral V. Acharya and Das — unanimously decided to reduce the policy repo rate by 25 basis and change the stance of monetary policy from neutral to accommodative.
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