The MPC reviewed macroeconomic developments and the outlook over the course of the past two days, ie, 2 and 3 April 2019 and in its meeting on 4 April, it voted by a 4/2 majority to reduce the policy repo rate by 25 basis points, and to maintain a neutral stance of monetary policy by a 5/1 majority. Dr Pami Dua, Dr Ravindra H. Dholakia, Dr Michael Debabrata Patra and Shaktikanta Das, the governor, voted in favour of the decision to reduce the policy repo rate by 25 basis points. Dr Chetan Ghate and Dr Viral V. Acharya, deputy governor, voted to keep the policy rate unchanged. Dr. Ravindra H. Dholakia voted to change the stance from neutral to accommodative.
The Supreme Court has held the RBI circular of 12 February 2018 on Resolution of Stressed Assets as ultra vires. The court has held that RBI’s directions under section 35AA of the Banking Regulation Act, 1949 “which are in respect of debtors generally” would be ultra vires of that section. Thus, the order of the Supreme Court mandates RBI to exercise its powers under Section 35AA “in respect of specific defaults by specific debtors”. The powers of RBI under Section 35AA and other sections of the Banking Regulation Act, 1949 are, therefore, not under doubt. In light of Supreme Court order, the RBI will take necessary steps, including issuance of a revised circular, as may be necessary, for expeditious and effective resolution of stressed assets. The RBI stands committed to maintain and enhance the momentum of resolution of stressed assets and adherence to credit discipline, said governor’s statement on Framework for Resolution of Stressed Assets.
The governor hopes to come out with guidelines, which will ensure effective transmission of rate cuts. Taking into account the feedback received during discussions held with stakeholders on issues such as (i) management of interest rate risk by banks from fixed interest rate linked liabilities against floating interest rate linked assets and the related difficulties, and (ii) the lead time required for IT system upgradation, it has been decided to hold further consultations with stakeholders and work out an effective mechanism for transmission of rates. In the meantime, we have taken several measures to enable better management of interest rate risk by banks, for instance, by allowing non-residents to participate in the Rupee interest rate swap market, the governor said.
The RBI has shelved its proposal to get banks to link their lending rates to an external benchmark like the repo rate or the government treasury bill rate.
Das said: “We have decided to constitute a Committee that will assess the state of housing finance securitization markets in India; study the best international practices as well as lessons learnt from the global financial crisis; and propose measures to further develop these markets in India. Recognizing the benefits of an active secondary market in loans, the Reserve Bank will set up a task force to study the relevant aspects, including best international practices and to propose measures for developing a thriving secondary market for corporate loans in India.
In support of the rate cut
Rate cut is entirely appropriate
Given further moderation in inflation expectations as estimated by RBI, rate cut of 25 bps is entirely appropriate. This should help in sustaining India’s growth to around 7.2-7.3% in FY 20, said Subhash Chandra Garg, finance secretary and secretary, department of economic affairs, ministry of finance, Government of India.
An opportune time for MPC to act
As was widely expected, the MPC decided to cut the repo rate by 25 bps. This is the second consecutive rate cut by the MPC, bringing the total reduction in policy rates to 50 bps in this ongoing rate easing cycle. Since the last monetary policy announcement, conditions had become more favorable for an easy monetary stance as GDP growth projection has been revised downwards, central banks in advanced countries have hit the pause button and rupee has appreciated, says CRISIL.
Along the way, the RBI has also acted swiftly to support liquidity in the system – by conducting adequate open market operations (OMOs) and more recently, the Indian rupee-US dollar swap. Total durable liquidity injected by the RBI through OMOs aggregated Rs 2.985 trillion for fiscal 2019 and the swap of $5 billion for a tenure of 3 years on 26 March 2019, added further durable liquidity of Rs 346 billion into the system. It was an opportune time for the MPC to act now rather than later because we believe inflation is slated to start rising as a favorable base effect has begun to wane and prices of some of the key food categories have started going up, feels CRISIL.
Banks have transmitted rate reduction of 10 to 12 basis points
Reduction in the repo rate is in sync with the expectations of the market. Cumulatively RBI has reduced the rate by 50bps evidently to push economic growth. It is pertinent to note in this context that RBI’s projection on economic growth has been marginally lowered to 7.2 %. Banks have transmitted the rate reduction to the tune of 10 to 12 basis points. Going forward, with this additional cut and improvement in the liquidity position, banks would take a call on further transmission. RBI projection on inflation which is below 4 % also provides additional comfort on the rate trajectory in future. IBA had represented the apprehensions of the banking sector on moving towards external benchmarks and in today’s policy RBI had indicated further discussions with the stakeholders before introducing EBLR. It has provided sufficient clarity on EBLR for the time being. Increase in the limit of FALLCR from 13 % to 15 % is another representation made by IBA which is considered by RBI. It will help banks in complying with the Liquidity Coverage Ratio. For the public, the fixation of the turnaround time for addressing the customer complaints and the extension of NBFC Ombudsman Scheme for Non-deposit taking NBFCs will provide additional cushion for dealing with their grievances, says Sunil Mehta, Chairman, Indian Banks Association (IBA) and Managing Director & CEO, Punjab National Bank.
Aided by low inflation, repo cut for aiding growth
Controlled inflationary scenario has provided RBI the elbowroom to act with a
successive 25 bps cut in Repo. With more grip on price levels, RBI has revised downwards the inflationary outlook which is positive for the banking sector. However, the ‘below-normal’ monsoon prediction may be a cause of concern in the coming months, says Dinabandhu Mohapatra, MD & CEO, Bank of India. On the growth side, RBI has shown concern over the dwindling domestic investment activities and softening global economy impacting India’s growth in the current financial year. Hence, it has taken successive accommodative stance to strengthen domestic growth impulses by encouraging private
investments, he added.
He also said the proposal to set up a Task Force on the Development of Secondary Market for
Corporate Loans is a welcome step. This will create market for stressed asset sale, where true value of these assets will be realized, and the banking sector will be benefitted. SLR requirements have been aligned further with the benchmark LCR requirements with an additional 2% of G-Secs to be reckoned within the mandatory SLR requirement, as FALLCR for the purpose of computing LCR, in a phased manner. Moreover, the intent of the policy seems supporting growth in the near-term. Move is also expected to alleviate the liquidity concerns
amongst the market participants.
Prudent, laudable MPC decision
The MPC decision is a prudent and laudable one and it has successfully managed to keep its stance flexible to react to the need to support growth even as it keeps a close watch on the upside concerns on inflation from rising oil and food prices going ahead, says B Prasanna, Head – Global Markets group, ICICI Bank. If incoming data on inflation and growth were to further surprise on the downside we could see the MPC cutting rates once more going ahead. It was surprising though that the MPC chose not to be more proactive on liquidity management while still deliberating on the need for keeping liquidity neutral in order to aid transmission. Further dispensations on FALLCR, while not aiding systemic liquidity will surely ease the burden on banks to raise fresh resources to manage LCR requirements. The proposal to commence the process of implementation of international settlement of Government securities by ICSD is a positive step towards internationalization of our Gsec market, he adds.
RBI options open for moving policy rate in either direction
Dr Sunil Kumar Sinha, Principal Economist, India Ratings and Research (Fitch Group) said, “As against our expectation of policy stance moving to accommodative, RBI kept it unchanged at neutral despite lowering its CPI inflation and FY20 GDP growth forecast downwards. India Ratings believe this simply means RBI wants to keep its options open with respect to moving the policy rate in either direction should such a situation arises. Despite comfortable inflation and inflationary expectations some of the risks that are looming large on this front are (i) stickiness in the core and core-core inflation (ii) abrupt reversal in vegetable prices especially during the summer month, (iii) uncertainty about the sustainability of the softening of inflation in the fuel group items especially oil where outlook continues to be hazy and (iv) probability of El Niño effects on the monsoon. One additional risk could be the fiscal policy stance of the new government.”
There is a scope of further reduction in rate
Sandip Somany, president, FICCI said, “We welcome the cut in repo rate, though we had expected a larger cut given benign inflation and slowing industrial as well as exports growth and liquidity concerns. We hope that the two consecutive cuts in the repo rate would translate into lower lending rates for both retail and corporate credit. This would give an impetus to the domestic economy through greater consumption demand as well as private investments. Over the last few months, there has been an improvement in capacity utilization across sectors as well as reduction in banking NPAs. The need of the hour is for monetary policy to complement the fiscal policy and strengthen the growth impulses that are slowly building in the economy. The real repo rate has remained high for a long time and there is a scope of further reduction in the repo rate. We do hope that RBI shall continue the accommodative stance in subsequent months as well,” added Somany.
Cut is to offset slowdown in growth
Abhimanyu Sofat, head of Research, IIFL Securities says: “MPC outcome of a 25 bps rate cut is to offset the slowdown in growth which is in line with the expectation. We see this policy as a non-event as future below normal outlook on monsoon and higher crude will impact the gradient of rate cuts.”
RBI concerned on global slowdown impact on growth
“The benchmark repo rate cut is broadly in line with expectations. The RBI also seems concerned on likely impact of global slowdown on domestic growth. The bond markets had already baked in such an outcome and hence the response post policy was quite tepid. The RBI had announced a $5bn INR USD FX swap wherein banks would get INR in lieu of swapping USD with the RBI for a period of 3 years. This we believe is a masterstroke from a liquidity injection perspective and such continued measures would certainly augur well for the fixed income markets. India fixed income yields currently are offering a compelling carry to be availed of by domestic and foreign investors alike,” says Lakshmi Iyer, CIO (Debt) & Head of Products, Kotak Mahindra AMC.
Calibrated easing
There are two critical takeaways from RBI’s forecast revisions: For second time in a row, the RBI is expecting four consecutive quarters of below target inflation outcome. On an average basis, the RBI expects inflation to be marginally lower in FY20 at 3.3% from 3.4% in FY19 – incidentally, this would be the lowest average annual inflation in India since FY91. This indeed provided room for the central bank to opt for incremental monetary accommodation, says a report of Yes Bank Economic Research.
As an extension, one might wonder, if the projected inflation trajectory is extremely benign, then why did the MPC stop at just one rate cut? Given that the economy is facing growth headwinds from the global side and there is a “need to strengthen domestic growth impulses by spurring private investment”, a larger dose of monetary accommodation could have been justified. It appears that the following considerations could have weighed against aggressive monetary easing: Preliminary observations by weather agencies across the world suggest some likelihood of El Nino related disturbance to India’s monsoon outlook. India’s private weather forecaster Skymet released its early forecast for Jun-Sep 2019 monsoon season, as per which rainfall outturn is expected to be below normal at 93% (of long period average). There is considerable uncertainty on the outlook for crude oil and international trade. Meanwhile, the fiscal consolidation process is undergoing a pause even as the quality of fiscal adjustment is set for some deterioration amidst the roll out of consumption stimulus.
While we are on the same page as the central bank on growth projection for FY20, we expect CPI inflation to be somewhat higher at 3.8% (nevertheless, below target) on account of lower horticulture production and reversal of the extremely soft food inflation regime.