Mumbai: In an attempt to propel economy ahead of the general elections, the RBI on Thursday lowered the benchmark interest rate by 0.25 per cent, the second cut in a row, to the lowest level in one year on softening inflation. It also lowered GDP growth forecast for the 2019-20 to 7.2 per cent from 7.4 per cent as predicted in February policy. The central bank, however, kept monetary policy stance ‘Neutral’ over uncertain monsoon. In the second policy review under Governor Shaktikanta Das, the six-member Monetary Policy Committee voted 4:2 in favour of the rate cut.
The move which will result in lower cost of borrowing for banks that are expected to transmit the same to individuals and corporates. Last time repo rate stood at 6 per cent was in April 2018. The rate cut is in consonance of achieving the medium term objective of maintaining inflation at the 4 per cent level while supporting growth, the RBI said in its first bi-monthly monetary policy statement for 2019-20. “The Monetary Policy Committee (MPC) notes that the output gap remains negative and the domestic economy is facing headwinds, especially on the global front. The need is to strengthen domestic growth impulses by spurring private investment which has remained sluggish,” it noted.
RBI said going forward, alternative farm support schemes and farm loan waivers announced by some state governments, higher minimum support prices and food procurement, and lower direct tax collections could put upward pressure on the combined fiscal deficit. It also said that headline CPI inflation is expected to move up from its recent lows as the favourable base effects dissipate but is expected to remain below the target of 4 per cent.
Talking about upside risk to inflation trajectory, it said, higher crude oil prices, volatility in international financial markets, the risk of a sudden reversal in the prices of perishable food items, and fiscal slippages are some of the challenges. However, there is a concern among government and RBI officials that commercial banks with massive bad debts and weak deposit growth are not automatically passing through the RBI’s repo rate cuts to borrowers.
RBI tweaks LCR norms to boost liquidity
In a bid to further improve the cash position of banks, the RBI provided additional 2 per cent liquidity window to the lenders by tweaking liquidity coverage ratio (LCR) norms. The LCR indicates the proportion of highly liquid assets held by banks to ensure their ability to meet short-term obligations. “While this move will harmonise the liquidity requirements of banks with LCR, it will also release additional liquidity for lending by banks,” Das said after unveiling the bi-monthly monetary policy.
RBI to set up task force on corporate loans’ secondary market
RBI said it would set up a task force to study the international best practices and develop a “thriving” secondary market for corporate loans. In its statement of developmental and regulatory policies released by the RBI after its first monetary policy meet of financial year 2019-2020, the apex bank said the task force would submit its report by the end of August, 2019. The RBI statement has brought out an 11-point agenda of regulatory policies.
“Recognising 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 propose measures for developing a thriving secondary market for corporate loans in India,” the RBI statement said. “Presently, the secondary market for corporate loans in India is dominated by transactions of banks in non-performing assets and is constrained by sparse information on pricing and recovery rates,” it said.
The apex bank said that among other steps, the task force would explore measures on loan contract standards, digital loan contract registry, ease of due diligence and verification by potential loan buyers, online platform for loan sales or auctions, and an accessible archive of historical market data on bids and sale prices for loans.
Guv Shaktikanta Das on data Row
Guv Shaktikanta Das said the Reserve Bank goes with official statistics while making its assessments on the economy and formulation its policy responses. A group of over 100 economists had gone public with their reservations on the GDP and other key dataprints last month in the light of the frequent revisions in the way the numbers are computed. Das, the bureaucrat-turned-central banker, told reporters that the RBI goes with the official statistics prepared by the Central Statistics Office (CSO).
When asked about his meeting with finance minister Arun Jaitley ahead of the policy, Das said there is nothing “unusual” about such a move. The central bank is monitoring the fiscal situation and will continue to watch the space closely, Das said. Looking at the key moves made by RBI on Thursday, one may expect the credit growth (liquidity) cycle to start picking smoothly. A similar move on Fiscal front, post elections may also act as a concentrated effort in bringing the growth forecast back on track, however not at the cost of heightened fiscal deficit.
