RBI takes a holistic approach to target market microstructure: Expert

The RBI’s decision to cut rates was a recognition of benign inflation numbers and growth slowdown pangs. However, the bouquet of policy announcements on developmental and regulatory front underlines the RBI’s attempt to further fine-tune the linkage of monetary policy and market microstructure.

Following the Budget, there have been apprehensions of a fiscal policy obfuscating a possible rate cut. I would like to highlight that a recent RBI paper on emerging market economies (EMEs) found that the observed slump in growth in the post-crisis period would have been much sharper in the absence of fiscal measures, implying that fiscal activism pursued by these EMEs was largely successful in arresting the downslide of growth, including in India. Clearly, fiscal policy is overtly important for growth as is fiscal consolidation. 

In hindsight, the decision to cut rates is clearly dictated by global headwinds. While growth in China remains a cause for serious concern, Euro area activity and even the decline in property prices in Canada and Australia is an emerging risk for advanced economies. Back home, a sharply declining income velocity suggests that increasing currency with public has failed to cause proportional increase in output. In fact, inflation projection at 3.9 per cent in Q3 FY20 suggests that there is more scope of rate cuts.

The announcements by RBI should be appreciated given the depth of coverage. The decision to raise the limit of collateral free agricultural advances for banks will now cover 75 per cent of eligible farmers. The RBI has also decided to set up an internal working group to review agricultural credit.  

With the change in bulk deposit criteria, around Rs1 trillion of bulk deposits might now be termed as retail deposits, increasing its share in total and, hence, better price discovery.

The intent to reward well-rated NBFCs would optimise their funding costs, but the larger picture lies in the freeing of capital for the banks. The change of risk weights as per rating distribution would lead to capital saving equivalent to 7.58 per cnet of the assets under consideration, thereby, releasing Rs19,000 crore of capital.

One announcement which is of great importance is the proposal to constitute a taskforce on offshore rupee markets. The decision on FPI investments in corporate bonds will establish connect with wider foreign investor audience to rake in the inflows. The ECB decision will hasten the process under IBC. 

Views expressed are personal