RBI keeps options open for more rate cuts with move to accommodative stance

The RBI’s decision to cut rates and move to accommodative mode was perhaps a manifestation of middle ground of delivering rate cut and keeping the ammunition ready for more. 

Global economic growth has lost pace after Q12019. Loss is growth is fairly widespread across both advanced and emerging economies. Weak global demand due to escalation in trade wars may further impact India’s exports and investment activity. Thus, a rate cut at this juncture was warranted. 

Even as the RBI cut its repo rate, the dogma of rate transmission continues to characterise the financial system and lending rates can only decline if banks adjust their deposit rates. The RBI manages systemic liquidity, based on the guidelines of Liquidity Management Framework, 2014. Given the focus that liquidity management has generated in the recent times, and the RBI’s tinkering with new ways of injecting durable liquidity, the time is right for putting in place a comprehensive policy accessible to all market participants. 

The policy also has several developmental and regulatory measures. The decision to adjust the Leverage Ratio for banks would allow the banks to increase their lendable resources by at least Rs 1 trillion, provided they have low risk weight assets and adequate capital.

Reviewing the entire gamut of ATM charges and fees is very timely. The growing cost of ATM deployment and maintenance incurred by banks on the one hand as well as the rising interchange outgo needs to be rationalised. 

Transactions from RTGS+NEFT channel has increased from Rs 75.5 trillion in April, 2014 to Rs 169.0 trillion in April, 2019. The decision to do away with the charges levied by the RBI for transactions processed is a welcome step and will boost digital fund transfers. This move will cost around Rs 2,000 crore to the RBI. The RBI move of comprehensive review of money market will remove the various anomalies like absence of uniform market hours. 

One disappointment of the markets with the policy could be the absence of a comprehensive package for the NBFC sector. We believe any hastily adopted move like AQR could have elongated the pain within the system. Rather, we need a carrot and stick policy as the regulator is currently doing. Interestingly, cash and bank balances with NBFCs have increased by around 53 per cent as on March 2019, reflecting that NBFCs are holding back cash and slowed disbursements. Clearly, it’s more of a solvency rather than a liquidity issue for NBFCs. 

However, the time has come for MPC to strictly ponder if financial instability should be thought as something that impedes the attainment of the inflation goals over time. 

Before we end, a food for thought for the forthcoming Budget. The New Zealand government has recently raised its expenditure plan amidst slower growth outlook in the 2019-20 Budget, dubbed as the “Well Being Budget”. By doing so, New Zealand has become the first country to introduce the “Well Being Budget”, designed to address the growing disparity between the haves and have-nots. Can we not do that in the forthcoming Budget for India given the large emphasis the current NDA government has on social objectives? 

Views expressed are personal