Reserve Bank of India (RBI) has signalled more rate cuts by changing its monetary policy stance from neutral to accommodative. It cut the repo rate by 25 basis points to 5.75%, the lowest in nine years, to push growth. All six members of Monetary Policy Committee (MPC) voted unanimously for a cut. The accommodative stance will also help in bringing down the government's borrowing cost. The yields on 10-year government bonds fell 10 basis points to close at 6.93% on Thursday.
"We are cutting rates when the inflation is still under control to take care of the growth concerns. With inflation under control, RBI has changed its stance to accommodative from neutral. Rate hikes are off the table for now," said Shaktikanta Das, RBI governor, at a press conference.
For this fiscal, GDP growth forecast has been cut by 20 bps to 7.0%, owing to the weak investment activity, weak global demand and moderation in private consumption "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," said Rajnish Kumar chairman, State Bank of India.
- Repo rate reduced by 25 bps to 5.75%
- Reverse repo rate now stands at 5.50%
- Marginal standing facility (MSF) rate 6%
- RBI changes policy stance to accommodative from neutral
- Cuts GDP growth forecast to 7% from 7.2% for FY20
- Raises retail inflation forecast for Apr-Sept to 3-3.1% and 3.4-3.7% in Oct-Mar
- Waives RTGS and NEFT charges to promote digital transactions
- Sets up a panel to review ATM charges, fees levied by banks
- To issue draft guidelines for ‘on tap’ licensing of small finance banks by Aug
- Average daily surplus liquidity in system at Rs 66,000 crore in early June
- Foreign exchange reserves at $421.9 billion on May 31, 2019
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The silver lining includes political stability, high capacity utilisation and uptick in business expectations. In the last two policies, RBI cut its growth forecast by 40 bps. RBI kept CPI inflation for FY20 at the same level with 3.0-3.1% in H1 of this fiscal (earlier 2.9-3.0%) and 3.4-3.7% in H2 of this fiscal (earlier 3.5-3.8%)," said SBI Ecowrap, the report put out by the economics wing of State Bank of India
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 should aid monetary transmission. Additionally, the easing of the leverage ratio requirement will boost bank lending and should serve as the much-needed counter-cyclical stimulus."
The cut in the leverage ratio (LR capital buffers) under the Basel III norms will also free up additional liquidity of Rs 1 lakh crore if they have lower risk weight assets and enough capital to meet the capital adequacy ratio, according to an analysis done by SBI Ecowrap. Most of the banks were maintaining a higher LR ratio of 4% to 4.8%, which now stands reduced to 3.5%
Kotak Securities in a report said, "MPC's accommodative policy stance amid a benign growth-inflation outlook has strengthened our case for another 25 bps cut in August. Rate cuts beyond August would, however, hinge on any downward surprises to the RBI's growth-inflation trajectory."
Even though the MPC believes that the recent pick-up in food prices has imparted an upward bias to the inflation trajectory, subdued global and domestic demand will result in further softening of core inflation during this fiscal, keeping the headline inflation broadly in check.
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