RBI sticks to familiar script, cuts repo rate by 25 bps to 5.15%

The Reserve Bank of India (RBI) in its fourth monetary policy review this fiscal year on Friday reduced the policy repo rate by 25 basis points (bps), and said the stance would continue to remain “accommodative as long as it is necessary to revive growth”, which the RBI revised sharply down from its earlier projections for 2019-20.

The repo rate now stands at 5.15 per cent, which was widely expected by analysts, according to a Business Standard poll.

All six members of the Monetary Policy Committee (MPC) voted for a cut, even as external member Ravindra Dholakia wanted a deeper cut of 40 basis points.

“With inflation expected to remain below target in the remaining period of 2019-20 and the first quarter of 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 policy statement said.

The central bank now expects growth in 2019-20 to be 6.1 per cent, down from its August projection of 6.9 per cent.

The RBI estimates 5.3 per cent in the second quarter, and in the range of 6.6-7.2 per cent for the second half of 2019-20, “with risks evenly balanced”.

The consumer price index inflation rate is expected at 3.4 per cent for the second quarter, from 3.1 per cent projected earlier.

The rupee closed flat at 70.89 a dollar, while the 10-year bond yield rose 8 basis points to 6.69 per cent. 

The Sensex, however, fell 433.56 points, or 1.14 per cent, to close at 37,673.31 points on lower growth projections. 

Even as the full-year growth projection came down by 80 basis points, the rate cut of 25 basis points was adequate at this point, considering that the central bank had lowered the repo rate by a cumulative 110 basis points in just a matter of seven months till August.

But RBI Governor Shaktikanta Das did not want to commit more rate cuts, even after a clear communication on the policy stance. “We have not said anything about the lower bound of the policy rate … you cannot infer the minimum repo rate and at what level the RBI will take a pause,” Das said in the conference after the announcement.

But economists expect at least another 25 bps cut, or possibly more, in the coming policies. “We expect more rate cuts in the forthcoming policy, considering that growth is somewhat tepid and the RBI’s mission as it has made it clear today is to get growth up through a combination of rate cuts and keeping money moving in the system,” said Abheek Barua, chief economist, HDFC Bank.

The finance ministry in a statement said it believed that a reduction in the repo rate would complement the recent measures, such as tax cuts, taken by the government to accelerate growth. The RBI governor said he saw no reason to doubt the government’s commitment on containing the fiscal deficit at the committed level of 3.3 per cent of GDP. 

The RBI governor was not satisfied with the transmission of past rate cuts, even as banks are now forced to link their retail loans to an external benchmark, including the policy repo rate. In response to the rate cuts of 110 basis points till August, the weighted average lending rate on fresh rupee loans of commercial banks declined by 29 basis points only, the governor said.

NITI Aayog Vice-Chairman Rajiv Kumar said the RBI's fifth consecutive rate cut reflected India's ambition to accelerate economic growth to touch 8 per cent sooner rather than later, PTI said V G Kanan, chief executive officer of the Indian Banks’ Association (IBA), said “the monetary transmission could be swifter” if banks were able to link their deposit rates with an external benchmark as well.

The RBI’s action was also influenced by central banks globally, especially those of the emerging markets, which are cutting rates, taking advantage of low inflation helped by soft oil and commodity prices.

In the domestic market, industrial production was lower in July on a year-on-year basis, pulled down mainly by manufacturing. The production of capital goods and consumer durables contracted. The output of the eight core industries shrank in August, with the output of coal, electricity, crude oil, and cement decelerating or going into contraction, the RBI governor said in his opening remarks.
 

However, the monsoon has been good and “Indian agriculture is well-positioned to lead the recovery, which augurs well for rural employment and income, and the revival of domestic demand”, the governor noted. The net inflow from foreign investors too has been better than in the previous year.

Other issues

The RBI governor said the Indian banking sector remained sound. Also, the RBI’s endeavour would be to ensure that the system does not “encounter failure of another large systematically important NBFC and we are having dialogues with them wherever required to resolve issues”.

The crisis at the Punjab and Maharashtra Cooperative Bank (PMC) should be taken as a representative case, and the RBI acted swiftly as soon as irregularities at the bank came to its notice, he said.

In a major move, the RBI accepted two critical recommendations of the Usha Thorat committee on offshore rupee markets. Domestic banks will now be able to freely always offer foreign-exchange prices to non-residents from their Indian books, either through a domestic sales team or their overseas branches. And, rupee derivatives settled in foreign currencies can be traded at International Financial Services Centres.

“Other recommendations of the Committee are under consideration and the decision thereon will be announced in due course,” the policy statement said.

The RBI also increased the eligibility limit of borrowers for microfinance loans, and raised the lending limit to these borrowers from Rs 1 lakh to Rs 1.25 lakh.  There were a number of measures taken in the payments and settlement systems, including making National Electronic Funds Transfer (NEFT) operational round the clock.