The Reserve Bank of India reduced the policy repo rate under the liquidity adjustment facility (LAF) by 35 basis points (bps) from 5.75% to 5.4% with immediate effect. Consequently, the reverse repo rate under the LAF stands revised to 5.15%, and the marginal standing facility (MSF) rate and the Bank Rate to 5.65%. RBI also decided to maintain the accommodative stance of monetary policy. In all, the central bank has cut rates by 110 bps so far this year.
The RBI has also sets out various developmental and regulatory policy measures in the areas of Payment and Settlement Systems; Banking Regulation, Financial Inclusion and Credit flow to NBFCs.
The RBI also announced that the National Electronic Fund Transfer (NEFT) system, currently available for customers from 8 am to 7 pm on all working days of the week (except 2nd and 4th Saturdays of the month) will be available on a 24×7 basis from December 2019. This is expected to further ease the retail payments system in the country.
The Bharat Bill Payment System (BBPS) currently covers 5 segments – direct-to-home (DTH), electricity, gas, telecom and water. In order to leverage the advantages of the BBPS and harness its full potential, it has been decided to permit all categories of billers (except prepaid recharges) who provide for recurring bill payments to participate in BBPS on a voluntary basis. Detailed instructions in this regard will be issued by the end of September 2019.
In order to benefit from diversification of risk as also to encourage innovation and competition, the RBI has decided to offer ‘on tap’ authorization to entities desirous to function/operate/provide platforms for Bharat Bill Payment Operating Unit (BBPOU), Trade Receivables Discounting System (TReDS) and White Label ATMs (WLAs).
With the digital payment ecosystem making substantial progress in terms of growth of payment infrastructure as well as volume and value of digital payment transactions, fraud risk monitoring and management by the stakeholders have assumed importance. The Payment System Vision 2021 also envisages a framework for collecting data on frauds in the payment systems. In order to carry forward these efforts and ensure quick and systemic responses, it is 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.
On a review, it has been decided to reduce the risk weight for consumer credit, including personal loans, but excluding credit card receivables, to 100%. Guidelines in this regard would be issued by the end of August 2019.
During the last one year, the RBI has taken several measures to facilitate credit flow to the well managed NBFCs/HFCs. It has now been decided to take following further measures to enhance credit flow to the NBFC sector: As a step towards harmonization 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% of Tier-I capital of the bank.
It has been decided to allow, subject to certain conditions, bank lending to registered NBFCs (other than MFIs) for on-lending to agriculture (investment credit) up to ₹10 lakhs; micro and small enterprises up to ₹ 20 lakh and housing up to ₹20 lakh per borrower (up from ₹10 lakh at present) to be classified as priority sector lending. Detailed guidelines on the above measures will be issued by the end of August 2019.
Here are some leading, representative voices on the RBI repo rate review:
Madan Sabnavis, Chief Economist, CARE Ratings: In a surprise move, the RBI went in for a larger-than-expected interest rate cut for the first time since Apr-12 taking the repo rate to a nearly 9 year low at 5.40% in August’19. The economic growth projections for H1FY20 and FY20 has also been lowered on concerns over subdued domestic economic activity (on account of muted private consumption and investments) along with worries over global economic slowdown following intensifying trade tensions between the US and China.
Some of the developmental measures announced will provide a positive push to lending in general with NBFCs also benefiting. Growth prospects for the year do not look likely to improve and can only decline further. I believe that the growth is likely to be in the range of 6.7-6.8% during FY20 on account of lower growth in the industrial sector than was earlier projected. The RBI is likely to reduce repo rate by another 25-50 bps cut in the FY20 which will be data driven.
Sunil Mehta, Chairman, Indian Banks’ Association: Cut by RBI in its benchmark repo rate by 35 basis points would go to reduce the lending rate offered by banks. Overall banks have reduced the interest rate on fresh rupee loans by 29bps. With improvement in liquidity position and reduction in deposit rates offered by banks, further reduction in lending rate are expected. Since inflation is still benign and is in the expected trajectory of the RBI, more focus is given to propel growth and private investment which are lagging behind for a long period of time.
To give further impetus to the retail segment, reduction in the risk weight for consumer credit from 125% to 100% would encourage banks to take more exposure to this sector. Upto June, 2019, year on year retail credit growth of 16.6 per cent is far higher than the overall credit growth of 11.1 per cent. By the time the festive season sets in, the lower lending rate would help to boost the domestic demand.
RBI and Government have taken several measures to increase the flow of credit to NBFCs. Permission to banks to take exposure to single NBFCs to 20% of Tier-I capital from 15% and further relaxation in priority sector lending by banks through NBFCs to agriculture, housing and MSMEs could further increase the flow of these specific and important sectors which are also job creators. Further, RBI has also announced various measures to boost payment systems i.e., round-the-clock availability of National Electronic Funds Transfer System, expands biller categories for Bharat Bill Payment System and creation of Central Payments Fraud Information Registry.
Vivek Kumar, Business Economics Banking, Yes Bank: In a departure from usual convention of changing benchmark rates by 25 bps (or multiples thereof), the repo rate was reduced by 35 bps to 5.40% (lowest since Jul-10). The RBI continues to forecast inflation trajectory at sub 4% levels over the next four quarters (i.e., until Q1 FY21). While monsoon risks have abated (see – India Monsoon Update: Bountiful in July, Aug 1, 2019), escalation of uncertainty on global trade could continue to impart downside risks to growth. we now project another 25-40 bps scope for rate cuts in the next one/two policy reviews. This could potentially take the repo rate towards 5.00%, the lowest since the level of 4.75% seen during the immediate aftermath of the Global Financial Crisis.
Mayank Jalan, President, Indian Chamber of Commerce: ‘RBI’s repo rate cut by 35 basis points (bps) from 5.75% to 5.4% is a welcome decision and appreciated by Indian Chamber of Commerce. Reduction in rate will transmit to cheaper loans which will boost the economy at large, especially sectors like real estate & auto and spur the latent consumer demand in these segments. Higher disposable income in the hands of consumer will also fuel the growth in domestic demand going forward. As a Chamber, we look forward to improved transmission of policy rate cuts onto lending rates’.
- Prasanna, Head, Global Markets group, ICICI Bank: The Monetary Policy Committee surprised positively with a 35 bps cut given on the back of a continued growth slowdown. The MPC remains sanguine on inflation with projections up to Q1 FY2021 remaining well under 4% while it downgraded GDP forecasts to 6.9% with downside bias. The Governor also spoke about the importance of monetary policy transmission and the central bank’s support to keep adequate liquidity in the system. Steps to enhance the credit flows to NBFCs and classification of certain sectors to the priority sector lending through NBFC on-lending are also welcome. Going forward, given the rhetoric that supporting private investment remains “highest priority”, we do not rule out further accommodation if growth impulses continue to be slow.
Kunal Shah, Fund Manager, Debt, Kotak Mahindra Life Insurance: Bond market was already expecting a rate cut but got disappointed by less dovish commentary, with 110bps of rate easing already done 10y treasuries should consolidate from current level of 6.35%. The downward trajectory to 6% on yields will open up if growth continues to disappoint and global tariff war persists. The cut in the policy rate was widely expected however the statement failed to give any guidance on future moves. Market participants believe growth outcome to be lower than MPC’s projection of 6.9%.
