MUMBAI:
The Reserve Bank of India(RBI) cut its policy interest rate by 25 basis points in a widely expected move on Thursday, while also changing its policy stance to “accommodative,” after latest data showed the economy growing at its slowest in over four years.
The RBI cut repo rate for the third consecutive time this year to 5.75 per cent from the current 6 percent after six-member monetary policy committee (MPC) headed by Governor Shaktikanta Das concluded its second meeting for the fiscal year 2019-20. On February 7 and April 4, the central bank had reduced the key lending rate by 25 basis points to infuse liquidity and push growth.
“A sharp slowdown in investment activity along with a continuing moderation in private consumption growth is a matter of concern,” the bank’s monetary policy committee (MPC) said in a statement after making its third cut since February.
However. the RBI lowered its growth forecast for the 2019/20 April-March fiscal year to 7 oer cent, having previously forecast 7.2% growth. while revising Consumer Price Index (CPI) inflation projection for April-September period upward to 3-3.1 per cent from 2.9-3 per cent and for October 2019 –March 2020 period to 3.4-3.7 per cent from 3.5-3.8 per cent.
“Risks around the baseline inflation trajectory emanate from uncertainties relating to the monsoon, unseasonal spike in vegetable prices, international fuel prices and their pass-through to domestic prices, geopolitical tensions, financial market volatility and the fiscal scenario,” RBI said in a statement.
The RBI chief said he was confident that changes in policy rates would be transmitted more strongly and more quickly to market rates, with the MPC noting that yields on longer-tenor bonds have begun to reflect recent rate cuts.
“Our expectation is that as we go forward there will be higher transmission and then there will be faster transmission also,” Das said.
Entering its second term following a landslide election victory last month, Prime Minister Narendra Modi’s government is expected to launch a fresh wave of economic reforms to unlock the growth after the unemployment rate rose to a multi-year-high of 6.1% in the 2017/18 fiscal year.
Asia’s third largest economy grew at a much slower-than-expected 5.8 per cent in the last quarter, far below the pace needed to generate jobs for the millions of young Indians entering the labour market each month.
Repo rate is the rate at which the RBI lends money to commercial banks. A repo rate cut allows banks to reduce interest rates for consumers on loans, and lowers equal monthly instalments on home loans, car loans and personal loans. India's economy grew just 6.8 per cent in 2018-19, according to government data. In the fourth quarter (January to March), the growth dipped to 5.8 per cent, marking a five-year low.
Meanwhile, headline inflation stood at 2.9 per cent year-on-year in April, below the RBI's target of 4 per cent.
All six of the panel voted for a 25 basis points cut, and for the stance to be changed to “accommodative” from “neutral”.
The MPC said it had factored in global economic conditions, noting that leading indicators point to slowing growth in the United States, Europe and China.
“Going by the macro undercurrents, the rate-cutting cycle will continue in the coming quarters as well,” said Rupa Rege Nitsure, chief economist at L&T Financial. “Today’s policy actions … give a clear signal that the RBI will continue with easy monetary conditions until it sees a definite improvement in growth-inflation mix.”
Markets reacted to the rate cut and change in stance as the 10-year benchmark bond yield fell to 6.89 per cent from 7 per cent before the policy announcement, while the rupee strengthened to 69.28 per dollar from 69.36 earlier.
Bankers have hailed the third successive rate cut by the central bank as a move that will boost growth, but remained non-committal on the specifics of how they intend to pass on the benefits to the borrowers.
"The decision to shift the policy stance to 'accommodative' will simultaneously help the financial system navigate to a lower interest rate regime and also look into growth concerns," SBI chairman Rajnish Kumar said.
Das hailed banks' effort on transmission, but asked them to do more through "higher and faster" lending rate cuts to help boost demand in a slowing economy.
Das said bankers have so far passed 0.21 percent of the 0.50 percent rate cuts since January, going by the weighted average lending rate but this has helped only new borrowers and not those already are in the credit market.
Sampath Reddy, Chief Investment Officer, Bajaj Allianz Life Insurance Company said,“The RBI MPC cut policy rates by 25 bps–along expected lines. And on a positive note, the RBI MPC unanimously voted for a change in policy stance from ‘neutral’ to ‘accommodative’. This dovish undertone is also being reflected in bond yields further softening post the policy announcement. The RBI also said that it has set up a committee to comprehensively review the liquidity management framework by mid-July, and this will be important for transmission of the rate cuts in the system. The RBI governor commented that partial transmission of the earlier cumulative 50 bps rate cut has happened at a slightly faster rate than previously.''
Sabharwal, MD and CEO, Tata Capital 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.”
However, the pace of transmission will be dependent on the liquidity environment, credit conditions, and also considering the relatively elevated credit to deposit ratio (with deposit growth lagging credit growth), he said.
On a positive note the governor added that the central bank is ready to support growth concerns to aid aggregate demand and private investment. We had earlier also commented that with inflation well below its target, the central bank’s focus will shift more from inflation to supporting domestic economic growth—and this statement by the governor seems along expected lines.
The governor indicated that the central bank is closely monitoring the stress in the NBFC/HFC sector, and will not hesitate to act in case of any financial instability.
Sensex tanked over 500 points intraday, extending its losses even after the Reserve Bank of India (RBI) decided to cut the repo rate by 25 bps. The benchmark was dragged by bank and financial services stocks that traded lower
Meanwhile, In a move that gives a big thrust to online fund transfers, the Reserve Bank of India (RBI) announced the removal of charges levied by the Central Bank for transactions processed in the Real Time Gross Settlement System (RTGS) and National Electronic Funds Transfer (NEFT) systems.
Banks are required to pass on these waived off / reduced charge benefits on RTGS and NEFT to customers. Detail instructions and clarity in this regard will be issued within a week to the banks by the RBI.
The RBI said that it will constitute a committee to review the Automated Teller Machines (ATM) interchange fee structure.
In its statement on developmental and regulatory policies, the RBI said that a Committee involving all stakeholders, under the chairmanship of the Chief Executive Officer (CEO), Indian Banks’ Association (IBA), will examine the “entire gamut of ATM charges and fees”.
In June 2018, the Confederation of ATM Industry (CATMI) had sought regulatory intervention to correct the fee structure in the loss-making ATM deployer industry.
The committee is expected to submit its recommendations within two months of its first meeting, the RBI said. The composition and terms of reference of the committee will be issued within a week.