The Reserve Bank of India’s monetary policy committee, as expected, slashed policy rates for the fifth time in a row on October 4, but the quantum was lower than market expectations.
The Indian rupee and bond prices fell after the RBI announced a cut in repo rates by 25 basis points to 5.15 percent. The Indian market also pared gains, while rate-sensitive stocks turned negative.
But, the big takeaway is that the central bank and the government are in sync on the policy response to revive faltering growth in Asia’s third largest economy.
“RBI has once again proved to be well ahead of the curve in unleashing monetary efficacies to combat the economic slowdown, in perfectly complementing the fiscal initiatives,” Dr K. Joseph Thomas, Head Research-Emkay Wealth Management, told Moneycontrol.
“In conformity with this aggressive approach, RBI is likely to continue with its campaign for more rapid transmission of the benefits to credit users, through lower rates to a large extent linked to the base rate.”
Thomas said more cuts in the rate were expected after the central bank lowered the GDP growth forecast from 6.90% to 6.10 % for FY20. “We need to see more action from the government for a consumption-led recovery,” he said.
The minutes of the MPC meeting will be published by October 18 and the next meeting is scheduled for December 3-5, 2019
Top 10 takeaways from the fourth bimonthly monetary policy statement, 2019-20:
Rate cut
MPC, on expected lines, slashed the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 5.15 percent from 5.40 percent with immediate effect.
Consequently, the reverse repo rate under the LAF stands reduced to 4.90 percent, and the marginal standing facility (MSF) rate and the bank rate to 5.40 percent.
Stance
MPC also decided to continue with an accommodative stance as long as it is necessary to revive growth while ensuring that inflation remains within the target.
These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 percent, within a band of +/- 2 percent while supporting growth, RBI said in a statement.
Inflation
The CPI inflation projection revised slightly upwards to 3.4 percent for Q2, while projections are retained at 3.5-3.7 percent for H2 2019-20 and 3.6 percent for Q1 2020-21, with risks evenly balanced.
With the inflation expected to remain below target in the remaining period of 2019-20 and Q1 2020-21, there is policy space to address these growth concerns by reinvigorating domestic demand within the flexible inflation targeting mandate.
“It is in this context that the MPC decided to continue with an accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target,” the note added.
GDP growth
Various high-frequency indicators suggest that the domestic demand conditions have remained weak. The business expectations index of the Reserve Bank’s industrial outlook survey shows muted expansion in Q3.
The real GDP growth for 2019-20 revised downwards from 6.9 percent in the August policy to 6.1 percent – 5.3 percent in Q2 2019-20 and in the range of 6.6-7.2 percent for H2 2019-20. The GDP growth for Q1 2020-21 is also revised downwards to 7.2 percent.
Majority decision
All MPC members voted to reduce the policy repo rate and to continue with the accommodative stance of monetary policy. Dr Chetan Ghate, Dr Pami Dua, Dr Michael Debabrata Patra, Bibhu Prasad Kanungo and Shaktikanta Das voted to reduce the repo rate by 25 basis points. Dr Ravindra H Dholakia voted to reduce the repo rate by 40 basis points.
Monetary transmission
The monetary transmission has remained staggered and incomplete. As against the cumulative policy repo rate reduction of 110 bps during February-August 2019, the weighted average lending rate (WALR) on fresh rupee loans of commercial banks declined by 29 bps.
However, the WALR on outstanding rupee loans increased by 7 bps during the same period.
Lending limit increased for NBFC-MFIs
NBFC-MFIs plays an important role in delivering credit to those at the bottom of the economic pyramid and enable them to play their assigned role in a growing economy. RBI proposed to revise these criteria for lending.
- i) Increase the household income limit for borrowers of NBFC-MFIs from Rs 1 lakh for rural areas and Rs 1.60 lakh for urban/semi-urban areas to Rs 1.25 lakh and Rs 2 lakh, respectively.
(ii) Raise the lending limit from Rs 1 lakh to Rs 1.25 lakh per eligible borrower.
Offshore rupee markets
RBI allows domestic banks to freely offer foreign exchange prices to non-residents at all times, out of their Indian books, either by a domestic sales team or through their overseas branches.
The central bank also allowed rupee derivatives (with settlement in foreign currency) to be traded at International Financial Services Centres.
Liquidity support for NEFT
The Reserve Bank will extend the collateralised liquidity support, available till 7.45 pm on NEFT on working days, round the clock. This will help in better fund management by banks.
Internal ombudsman for large non-bank Prepaid Payment Instrument (PPI) issuers
To strengthen the grievance redressal mechanism at the entity level itself, it has been decided to institutionalise an internal ombudsman scheme at the large non-bank PPI issuers.
The ombudsman is intended to facilitate a swift and cost-effective complaint redressal mechanism within the entity and provide an additional tier for grievance redressal. Instructions in this regard will be issued by October 15.
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