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RBI’s rate cut to spur economy, help consumers

The Reserve Bank of India (RBI) has announced a repo rate cut by 25 basis points in June, yet another rate reduction by the central bank in 2019 calendar year. It is expected that interest rates would come down as banks would take commensurate decision in the wake of this decision. Post the revision, the repo rate stands at 5.75%. Similarly, reverse repo rate has also been reduced to 5.5% from 5.75%. In the February and April 2019 reviews of the rates, the RBI reduced the rates by 25 bps each time. In the immediate future, if the banks decide to pass on the benefits to customers, EMIs are likely to go down.

Shaktikanta Das, governor of the RBI, said it is the bank’s expectation that there will be higher transmission and then there will be faster transmission as well. “This transmission will find its impact on individual consumer loans, consumer durable loans and two wheeler loans as well,” he added.

The decision to cut the rates was a unanimous one at the RBI’s Monetary Policy Committee as it felt there is need for such a cut in order to spur economic activity, which had decelerated in the January-March quarter. The last time the repo rate was at 5.75% was in the July-September 2010 period. Governor Das said the unanimous vote reflects the resolve of the MPC to act decisively and to act in time. He said the RBI will ensure that adequate liquidity is available in the system for all productive purposes. An accommodative stance basically means that rate increase is off the table.

Banking and financial services sector stalwarts welcomed the decision. Rajnish Kumar, chairman, SBI, said: “The RBI policy decision to change the policy stance to ‘accommodative’ will simultaneously help the financial system to navigate to a lower term structure of interest rates and also accommodate growth concerns. On the regulatory front, the decision to lower the Basel III Leverage Ratio will augment the lendable resources of the Banks. Also the move to scrap transaction charges for RTGS & NEFT will boost digital transactions. The decision to issue draft for ‘on-tap’ licensing of small finance banks will add depth to this sector. Launching of the on-line trading platform for retail participants is a positive development for small & medium forex customers. The RBI intent to harmonize existing regulations for different money market products augurs well for market transparency.”

Zarin Daruwala, CEO, Standard Chartered Bank, India, said: “The combination of the repo rate cut, the change to an accommodative stance and the resolve to provide adequate liquidity, will provide the impetus to counter growth and investment headwinds. A review of the liquidity framework is a welcome move and should aid monetary transmission. Additionally, the easing of the leverage ratio requirement will boost bank lending and should serve as the much needed countercyclical stimulus.”

  1. Prasanna, group head – Global Markets – Sales, Trading and Research, ICICI Bank, said: “The policy was very positive and was reinforced by unanimous voting and the change in stance to accommodative. The statement’s focus on supporting growth and bolstering private investment as long as inflation remains within the mandate, is also encouraging and leads us to believe that more accommodation is on the cards. Our own expectations for growth and inflation for FY2020 also underscore this view as we expect headline inflation to average under 4% and have revised our growth forecasts lower. The internal committee for liquidity framework is a welcome step. It will help to reduce the information asymmetry regarding systemic liquidity and will benefit not only markets but also banking decisions as regards, deposit taking, lending and transmission. Further, in light of the recent upheavals in the NBFC space, the governor’s statement that all necessary steps would be taken to maintain financial stability is reassuring.”

Shubhada Rao, chief economist, Yes Bank, said: “There are 3 critical takeaways from RBI’s forecast revisions: Since its first policy decision in October 2016, this is only other time that the entire MPC voted unanimously for a rate cut. The monetary policy stance is back to ‘accommodative’ for the first time since December 2016, thereby effectively ruling out the possibility of a rate hike in the near to medium term. The RBI continues to forecast inflation trajectory at sub 4% levels with FY20 average inflation expected at 3.3%, the lowest since FY1991.

The central bank has turned dovish in its assessment with the adoption of the accommodative stance and underscoring of the possibility of further easing “to boost aggregate demand, and in particular, reinvigorating private investment activity, while remaining consistent with its flexible inflation targeting mandate”. The raison d’etre for the shift in monetary policy stance appears to be driven by a buildup of growth concerns since the last policy review, which now unambiguously points towards the opening up of a negative output gap in the economy. Factors like moderation in inflation expectation of households and producers, recent softness in global commodity prices, and a dovish turn by systemically important central banks provided further support.”

  1. K. Gurumurthy, head, Treasury, Lakshmi Vilas Bank, said: “The RBI cut repo rate for the third time in a row, along with a change in stance to being ‘accommodative’ from ‘neutral’. The decision was achieved with an overwhelming 6-0 majority, a first of its kind. More pertinent to the economy is that the policy lays ground for further policy softening. Inflation estimates have been lowered and so are the GDP estimates. Besides moving to an accommodative liquidity stance, the governor also reiterated that the RBI will ‘ensure adequate liquidity in the system”. It could imply we may see more measures in the coming days that help achieve faster and sizeable rate transmission – a pass through of 75 basis of the 3 rate cuts should happen in the coming months, currently only about 21 basis is perceived to have been transmitted. This may also imply that deposit rates may start falling sharply in the coming days.

Khushru Jijina, MD, Piramal Capital and Housing Finance, said: “The downward revision of growth projection by the RBI from 7.2 % to 7% in 2019-20 calls for the implementation of additional rapid policy interventions by both RBI as well as the government. The unanimous decision by the Monetary Policy Committee to cut the repo rate by another 25 bps is a step in the right direction. NBFCs are instrumental in providing credit to MSMEs and real estate sectors, that are significant to India’s GDP. MSMEs contribute 31% of the GDP, 40% of exports and hires 25% of the labor force while real estate contributes more than 5% to GDP and hires 17% of the labor force directly or indirectly. The credit crunch in the NBFC sector has witnessed a corresponding decline in manufacturing and construction activities in the last two quarters of 2018-19. We anticipate more decisive and pro-active policy measures to address the current liquidity crisis, that will enable NBFCs to restore lending activities, especially to these critical sectors.”

Rajiv Sabharwal, MD and CEO, said: “The 25 bps rate cut and the shift to an accommodative stance will provide further stimulus for growth. The inflationary trends remain moderate and in the RBI’s comfort zone. Fed’s policy stance and softening of treasury yields will continue to support the FII inflow momentum. The proposed comprehensive review for money market products will further strengthen the financial sector. The regulator has demonstrated its commitment to provide systemic liquidity through various tools that are available at its disposal. To achieve a sustained growth, there is also a need for a more efficient rate transmission framework.”

Vasu Ramaswami, COO, Muthoot Fincorp, said: “The latest rate drop should help in improving consumption demand, particularly for the common man, especially once banks decide to pass this rate change to their customers. For the NBFC sector, which has been under some level of tightened liquidity conditions, this should also help in accessing more funds at a cheaper rate, which would eventually help in providing timely credit to millions of their small customers.”

Kumaresh Ramakrishnan, head – Fixed Income, DHFL Pramerica Mutual Fund, said: “The Monetary Policy Committee unanimously voted for a rate cut of 25 bps and a change in stance from ‘neutral’ to ‘accommodative’. The rate and stance easing were helped by RBI’s assessment of downward revision in GDP to 7.0 for FY 20 (by 20 bps over the earlier forecast) and a lowering of the upper end of the inflation band by 10 bps to 3.7% by March 2020. Given that the one year forward CPI forecast is well under the medium term CPI target of 4%, the policy tone was distinctly accommodative and pro-growth. Recent rounds of liquidity infusion both through OMOs and INR – USD swaps have started reflecting in easing liquidity conditions causing the average daily surplus in June to turn positive to the tune of INR 660 bio. The MPCs assessment of a distinct weakening in growth conditions, slow-down in investment activity, fall in consumption and expected inflation trajectory remaining below the target are all positives for yields in the near to medium term.

Dr Sunil Sinha, principal economist, India Ratings and Research (Fitch Group) said: “As expected RBI cut the repo rate by 25 basis in the second bi-monthly monetary policy statement of FY20. Given the domestic and global  developments such as (i) inflation consistently undershooting RBI’s targeted 4% mark and likely to do so during FY20 (ii) softening of global crude oil prices (iii) adequate food grain stock even if monsoon remains subpar in 2019 and (iv) waning of growth impulse due to moderation in both consumption and investment a cut in the policy rate was a forgone conclusion. Even a change in the policy stance had become inevitable in view of 3 consecutive rate cut. By changing its policy stance from neutral to accommodative RBI has signaled that rate increase is not on the table in the near term. Although India Ratings and Research believes there is room for one more rate cut of 25bp in this fiscal, its timing will depend on the progress of monsoon, fiscal stance of FY20 budget and the incoming high frequency data.”

Karthik Srinivasan, group head, Financial Sector Ratings, ICRA said: “Change in policy stance to accommodative and benign inflation outlook and the likelihood of further rate cuts led to a decline in government bond yields. Further, the stance on maintaining comfortable liquidity conditions also indicate towards the possibility of further open market purchase of these bonds by RBI during FY2020, the extent of will depend on foreign capital inflows.

“During the last few quarters, supported by various liquidity infusion measures, the overall liquidity deficit has remained within the RBI targeted levels of 2% of net demand and time liabilities; however, the extent of volatility has been high. The proposed review of liquidity management framework is hence positive as there is a need for greater clarity on the usage of various tools or liquidity levels at which various triggers for liquidity infusions get activated to improve the transparency of the liquidity framework”.

CRISIL Research said: “The third consecutive rate cut of 25 bps by the MPC takes the cumulative reduction in the ongoing rate easing cycle to 75 bps. The MPC has been vocal with its concerns on the growth front. The rate cut, therefore, was largely anticipated and was adequately reflected in the sharp fall in bond yields of late. That, along with the change in stance to accommodative, suggests the MPC’s optimism in containing inflation below the target for the rest of the year and the need for the monetary policy to support growth at a time when fiscal policy remains constrained. CRISIL believes another rate cut can be expected if the monsoon progresses favorably and the government remains committed to its fiscal consolidation path.”

Udaya Kumar Hebbar, managing director and CEO, CreditAccess Grameen Koota, said: “The measures introduced will be a stimulus for improving investment and will boost capex, supported by conducive inflation environment. We expect the economic expansion to bolster starting this quarter as liquidity will improve and credit offtake will improve its pace”

Deo Shankar Tripathi, MD & CEO, Aadhar Housing Finance, said: “Concerned with the weakening growth, the RBI has taken a very appropriate step by changing the stance from neutral to accommodative which means no risk of rate hike in subsequent months.  This will be a big support to improve the demand as well as to revive the private sector investment. The RBI has also reassured the market for required support to strong NBFCs and HFCs. For liquidity concerns, RBI has set up task force which is a very timely decision and once the liquidity in the system normalizes, I think all the sectors will get the boost. The reduction in repo rate by 25bps will also boost overall sentiments and also some reduction in EMI of loans.”

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