Opinion | RBI delivers a surprise and turns growth friendly

The Reserve Bank of India (RBI) Governor Shaktikanta Das (Image: Reuters)

John Maynard Keynes is often quoted saying: “When the facts change, I change my mind”. That is exactly what Reserve Bank of India Governor Shaktikanta Das and the members of the Monetary Policy Committee (MPC) have done. It surprised with 25 basis points (100 bps=1 percentage point) cut in the policy repo rate to 6.25 percent. The committee also decided to change its policy stance from calibrated tightening to ‘neutral’ as expected. By lowering growth estimates as well as inflationary projections, the MPC has made the rate cut look congruent with reality.

It must be noted that there has been a significant change in the macro-economic backdrop, both in India and the global markets, since the last policy (December 5, 2018). There was a lot of hand-wringing given that the RBI had refused to change its stance, much less cut rates despite continuing to lower inflation forecasts. With the Interim Budget slipping a tad on the FY19 fiscal target, and by rolling out a direct cash transfer scheme for farmers and putting some more money into middle-class pockets, there was a concern that the RBI will turn averse to a rate cut. However, the RBI noted that the “full effect of some of the measures is likely to materialise over a period of time.”

India has witnessed significant disinflation since 2012-13 as Das had averred sometime back, with headline consumer inflation moderating from an annual average of 10 percent in 2012-13 to 3.7 percent in 2018-19 so far.

With the RBI’s own expectation of inflation being 2.8 percent in Q4, it has used the space and shifted its focus clearly towards growth. The MPC noted that the “output gap has opened up modestly as actual output has inched lower than potential. Investment activity is recovering but supported mainly by public spending on infrastructure. The need is to strengthen private investment activity and buttress private consumption.”

Does that mean that the next meeting of the MPC, scheduled from April 2 to 4, will see another rate cut? The RBI has maintained it will remain data dependent. However, with the MPC projecting headline inflation to stay at about 3.9% till Q3 FY20-end, there seems room for further accommodation.

RBI has also announced a few steps that will support consumption, especially on the rural side. It raised the limit of collateral-free farm loans given by banks to Rs 1.6 lakh from the current Rs 1 lakh. It has also announced that NBFC norms will be re-looked at in the context of risk-weights — this can provide respite on the rural consumption side as NBFCs have been big drivers of credit in this space.

It also has allowed bidders of insolvent companies to raise extra commercial borrowings from abroad and use those proceeds to repay the rupee loans of the targeted insolvent companies. The move to relax the provisions on end-use of external commercial borrowings (ECB) proceeds will be a positive for the Insolvency & Bankruptcy Code (IBC).