RBI MPC Review Oct'19

The Reserve Bank of India in its bimonthly policy review, slashed the repo rate, by 25bps to 5.15% from 5.40% with immediate effect, for a fifth straight time this year. The RBI moved the repo rate to the lowest level recorded since April 2010. Consequently, the reverse repo rate under the LAF stands reduced to 4.90% and the marginal standing facility (MSF) rate and the Bank Rate to 5.40%. With this, the RBI has cut rate repo rate by 135bps in 2019. The rate cut might encourage private consumers to save less and spend more while also, making credit available at cheaper rate for industries. If both these works perfectly, then we should see the economy come back on track. All members of the six-member Monetary Policy Committee voted for a rate cut. One member, Dr. Ravindra H. Dholakia voted for a 40 basis point cut, while the others opted for a quarter-point easing.


With a first quarter GDP growth plunging to 5%, the RBI cut its estimate of economic growth in the current fiscal to 6.1% from its earlier estimate of 6.9%.  The RBI revised the real GDP to 5.3% in Q2FY20 and in the range of 6.6-7.2% for H2FY20. The central bank, also, negatively revised the GDP growth for Q1FY21 to 7.2%. There is policy space to address these growth concerns by reinvigorating domestic demand, the central bank said in a statement. The Monetary Policy Committee “decided to continue with an accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target.”


Inflation in August accelerated to a 10-month high but remained well below the central bank's medium-term target of 4% for a 13th straight month. The RBI said it expects inflation to stay under this target through to the early months of fiscal 2020-21. CPI inflation projection is revised slightly upwards to 3.4% for Q2 2019-20, while projections are retained at 3.5-3.7% for H2 2019-20 and 3.6% for Q1 2020-21, the statement added. Volatile crude oil prices and the persisting geo-political uncertainties pose some upside risks to the inflation outlook.

RBI governor Shaktikanta Das told banking system remains sound and stable and there is no reason for any panic. He added that they are not aware of any demand from the government for payment of interim dividend. On PMC Bank he told the RBI acted very swiftly and promptly after it was brought to its notice and one incident cannot be and should not be used to generalize about the health of all cooperative banks and they will continue to monitor PMC Bank situation and keeping in mind the interest of depositors.  The RBI will take a fresh look at co-operative bank regulatory framework.

On the development and regulatory front, the decision to extend the collateralised liquidity support on round-the-clock basis is a welcome step as it will help banks extend the NEFT facility in a seamless and non-disruptive manner. Allowing domestic banks to quote exchange rates on 24-hour basis heralds a paradigm shift for the Indian forex market. Creation of the Acceptance Development Fund and the decision to have 100% digitally enabled districts in each state or union territory will further expedite the current pace of expansion of the digital payment ecosystem across the country.  

With the festive season round the corner, we believe this repo rate cut will certainly benefit the Real estate sector and Auto sector as a majority of banks have shifted loans to repo rate linked products and linking of certain type of loans with the external benchmark, the monetary transmission of rates could be swifter, if banks could make similar changes in deposits. Loan Melas are also been organized that will help provide instant loans. While lower lending rates are welcome, they alone may not be able to turn around the sentiment in the economy. It would need to be accompanied by spending from the government. However, the steps being taken by the government to boost demand along with a good monsoon, corporate tax cut and increased foreign institutional and direct investment flows should lead to a healthy revival in growth in Oct-Mar. There may be further cuts in the rate in light of the GDP growth forecast being lowered FY20. The RBI meeting minutes will be published by October 18. The next RBI monetary policy meeting is scheduled during December 3-5, 2019.


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