All members of the MPC unanimously voted to reduce the policy repo rate and to maintain the accommodative stance of monetary policy
Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on expected lines slashed key rates for the fourth time in a row on August 7. The committee cut the rate by 35 bps. It now stands at the lowest level since April 2010.
The rate cut was largely in-line with market expectations. Almost 50 percent of the experts polled by CNBC-TV18 said the MPC would cut rates by 50 bps while 40 percent expected a rate cut of 25 bps, and the rest 10 percent anticipated a cut of 75 bps on August 7.
Explaining the rationale to the reports, Shaktikanta Das told reporters in the press conference that a 25 basis points rate cut would have been inadequate while a 50 basis points rate cut would have been excessive.
Taking stocks of the global and domestic environment, the MPC reduced the policy repo rate under the liquidity adjustment facility (LAF) by 35 basis points (bps) from 5.75 percent to 5.40 percent with immediate effect.
Consequently, the reverse repo rate under the LAF stands revised to 5.15 percent, and the marginal standing facility (MSF) rate and the Bank Rate to 5.65 percent. The MPC also decided to maintain the accommodative stance of monetary policy.
It was a unanimous decision taken by the committee members. All members of the MPC unanimously voted to reduce the policy repo rate and to maintain the accommodative stance of monetary policy.
“The RBI continued with the rate cut cycle but in a surprise change to the quantum, reduced repo rate by 35 bps. While this induces some uncertainty in market expectations of the quantum of rate changes, it provides the RBI MPC with a greater degree of flexibility in signalling their intent,” Suvodeep Rakshit, Senior Economist at Kotak Institutional Equities told Moneycontrol.
“The 35 bps rate cut should be seen as a signal that the RBI MPC is quite concerned with the growth outlook beyond the usual 25 bps rate cut in a business-as-usual scenario (even though it does not reflect in the revised FY20 GDP growth estimate). The RBI MPC did not necessarily want to deliver a 50 bps rate cut and hence retains the scope to reduce rates further,” he said
Global economic activity has slowed down since the meeting of the MPC in June 2019, amidst elevated trade tensions and geopolitical uncertainty. Among advanced economies (AEs), GDP growth in the US decelerated in Q2.
In the Euro area too, GDP growth moderated in Q2 on worsening external conditions. Economic activity in the UK was subdued in Q2 with waning consumer confidence on account of Brexit related uncertainty and weak industrial production.
In Japan, available data on industrial production and consumer confidence suggest that growth is likely to be muted in Q2. Economic activity remained weak in major emerging market economies (EMEs), pulled down mainly by slowing external demand.
Global economic activity has slowed down since the meeting of the MPC in June 2019, amidst elevated trade tensions and geopolitical uncertainty. Among advanced economies (AEs), GDP growth in the US decelerated in Q2.
In the Euro area too, GDP growth moderated in Q2 on worsening external conditions. Economic activity in the UK was subdued in Q2 with waning consumer confidence on account of Brexit related uncertainty and weak industrial production.
In Japan, available data on industrial production and consumer confidence suggest that growth is likely to be muted in Q2. Economic activity remained weak in major emerging market economies (EMEs), pulled down mainly by slowing external demand.
RBI revised the real GDP growth for 2019-20 downwards from 7 percent in the June policy to 6.9 percent – in the range of 5.8-6.6 percent for H1FY20, and 7.3-7.5 percent for H2 – with risks somewhat tilted to the downside. The GDP growth for Q1FY21 is projected at 7.4 percent.
The central bank also highlighted that various high-frequency indicators suggest a weakening of both domestic and external demand conditions. The Business Expectations Index of the Reserve Bank’s industrial outlook survey shows muted expansion in demand conditions in Q2.
The transmission of policy repo rate cuts to the weighted average lending rates (WALRs) on fresh rupee loans of banks has improved marginally since the last meeting of the MPC.
Overall, banks reduced their WALR on fresh rupee loans by 29 bps during the current easing phase so far (February-June 2019).
As a debt manager to the States in terms of Section 21A of RBI Act 1934, the Reserve Bank has been making efforts to develop the SDL market in both primary and secondary segments.
RBI decided to introduce the stripping/reconstitution facility for SDLs. This measure will be implemented in consultation with the respective State governments.
Currently, the National Electronic Funds Transfer (NEFT) payment system operated by the Reserve Bank as a retail payment system is available for customers from 8.00 am to 7.00 pm on all working days of the week (except 2nd and 4th Saturdays of the month).
As mentioned in the Payment System Vision 2021 document, the Reserve Bank will make available the NEFT system on a 24×7 basis from December 2019. This is expected to revolutionise the retail payments system of the country.
Under the standardised approach for Credit Risk Management, consumer credit, including personal loans and credit card receivables attract a higher risk weight of 125 percent or higher, if warranted by the external rating of the counterparty.
On a review, it has been decided by the RBI to reduce the risk weight for consumer credit, including personal loans, but excluding credit card receivables, to 100 percent. Guidelines in this regard would be issued by the end of August 2019, said the RBI statement.
RBI, to increase the credit flow to certain priority sectors, is looking at ways to allow bank lending to registered NBFCs (other than MFIs) for on-lending to Agriculture (investment credit) up to Rs 10 lakh.
Micro and Small Enterprises up to Rs 20 lakh and housing up to Rs 20 lakh per borrower (up from Rs 10 lakh at present) will be classified as priority sector lending.
A bank’s exposure to a single NBFC is restricted to 15 percent of its Tier I capital, while for entities in the other sectors the exposure limit is, 20 percent of Tier I capital of the bank, which can be extended to 25 percent by banks’ Boards under exceptional circumstances.
As a step towards harmonisation of the counterparty exposure limit to single NBFC with that of the general limit, it has been decided to raise a bank’s exposure limit to a single NBFC to 20 percent of Tier-I capital of the bank.
RBI proposed to facilitate the creation of a Central Payment Fraud Registry that will track these frauds. Payment system participants will be provided access to this registry for near-real time fraud monitoring.
The aggregated fraud data will be published to educate customers on emerging risks. A detailed framework in this regard will be put in place by the end of October 2019.
