RBI Cuts Repo Rate By 0.25% – Meeting Highlights

RBI Monetary Policy Committe Meet Highlights 4th April 2019

Introduction

The Reserve Bank of India, RBI cuts repo rate by 0.25% to 6% on 4^th April 2019. RBI has also maintained the policy stance neutral and lowered the retail inflation and GDP forecasts.

On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting on 4^th April 2019 decided to reduce the policy repo rate by 25 basis points to 6.0% from 6.25% with immediate effect. The MPC also decided to maintain the neutral monetary policy stance. These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.

Key Highlights And Impacts of RBI Bi-monthly Monetary Policy Committee Meet

1. Repo Rate Cut By 0.25%

• RBI cuts the repo rate by 25 basis points to 6.0% from 6.25%. Consequently, the reverse repo rate adjusted to 5.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 6.25 per cent.
• The six-member committee voted 4:2 for the decision. Dr. Pami Dua, Dr. Ravindra H. Dholakia, Dr. Michael Debabrata Patra and Shri Shaktikanta Das voted in favour of the decision to reduce the policy repo rate by 25 basis points. Dr. Chetan Ghate and Dr. Viral V. Acharya voted to keep the policy rate unchanged.

2. Neutral Stance

• The Monetary Policy Committee (MPC) also decided to maintain the neutral monetary policy stance.
• The voting was  5:1 for the decision. Dr. Chetan Ghate, Dr. Pami Dua, Dr. Michael Debabrata Patra, Dr. Viral V. Acharya and Shri Shaktikanta Das voted in favour of the decision to maintain the neutral stance of monetary policy. Dr. Ravindra H. Dholakia voted to change the stance from neutral to accommodative.
• The stance has been maintained at neutral perhaps in the context of the rising crude price and concerns regarding a below normal monsoon.

3. CPI Inflation is lowered to 2.4% from 3%

• RBI has revised Consumer Price Index (CPI) Inflation target downward sharply to 2.4% from 3%.
• CPI inflation was seen at 2.9-3% in the first six months of FY20, below the RBI’s comfort zone of 4%. RBI sees inflation rising to 3.5-3.8 per cent in the second half, with risks evenly balanced. When RBI feels that CPI inflation is under control, things like repo rates cut happens.

4. Forecasted GDP growth rate is revised to 7.2% from 7.4%

• RBI has revised Expected (Forecasted) GDP growth rate for 2019 from 7.4% to 7.2%. GDP growth for 2019-20 is projected at 7.2% (in the range of 6.8-7.1% in H1:2019-20) and 7.3-7.4% in H2, with risks evenly balanced.
• Signs of domestic investment activity weakening, will reflect in a slowdown in production and imports of capital goods. The moderation of growth in the global economy might impact India’s exports. Thus there is a small downgrade in the GDP growth rate.

5. Transmission Process

• When RBI cuts repo rate, Banks should immediately cut the interest rates of the loans. Interest rates of home loans, vehicle loan or business loans should be come down hand-in-hand.
• Transmission of the previous rate cut in February did not materialize as liquidity remained tight. Despite the RBI’s continued open market operations and the dollar-rupee swaps, systemic liquidity as of March-end was in deficit at Rs 40,000 crore. The tightness in liquidity was visible in high credit-deposit ratios and elevated corporate bond spreads.
• This transmission system should get properly benchmarked. Still there are no final guidelines regarding the transmission process yet. RBI has given a positive signal by repo rates cut. Because it helps enhancing the demand and thereby growing the economy.

6. Closed Monitoring of Fiscal Position by Government

1. RBI has observed that the government should perform monitoring on the fiscal positions. There is a deficit in the revenues. Before last 6-7 days, there was a deficit of Rs1,80,000 Crore in the direct tax revenue. Still there is a deficit of Rs. 80,000 Cr in direct tax collection. Fiscal deficit no is 3.351% and can go further to 3.5% Revenue from GST tax collection was quite good. Still taking both direct and indirect tax collection into the account, there is a deficit of Rs 60,000 Cr currently.
2. Government have to clarify how these deficit no can be further decreased. Otherwise, a bad fiscal position would show its cascading impact in many places- rupee may depreciate; it will hamper the various types of government spending. Therefore, government show do a closed monitoring on its fiscal position, suggested by RBI observation.

7. Stock Market reaction

• RBI has cut repo rate, so it should have a good impact on the economy and thus on the stock market. Because, generally when repo rates cut, interest rates come down, profitability of companies will increase.
• BSE Sensex traded 50 points down at 38,820 on 4^th April. The rupee extended its weakness and was down 43 paise at 68.87. The 10-year bond yield stood at 7.3, up 0.4%

8. Monsoon Prediction

• Skymet consignment has given monsoon prediction to be below normal. Generally, Average normal monsoon prediction is in the range 90%-96%.
• Below normal monsoon prediction can be resulted into rural distress/farmer distress. It can also have a cascading impact on the economy.
• As a result all these perceptions has affected the market and market has given negative reactions to the same(market has come down due to it).

9. Positive Impact on Corporate Banks, Auto Companies & NBFCs

• Repo rates cut can have a positive impact on the corporate banks such as SBI, ICICI Bank, Axis Bank, Yes Bank etc to increase their profitability.
• Auto companies, specifically 2 wheeler auto companies such as Bajaj Auto, Hero Moto Cop can be benefited from the repo rates cut.
• In addition it, NBFCs particularly Housing Finance Companies like India Bulls, DHFL, HDFC, Grow Finance would have a very good impact of RBI repo rates cut. So sentimentally these stocks are positive in near future.

summary

1. Monetary Policy Committee (MPC) noted that the output gap remains negative and the domestic economy is facing headwinds, especially on the global front. So there is a need is to strengthen domestic growth impulses by spurring private investment which has remained sluggish.
2. Against this backdrop, the MPC decided to reduce the policy repo rate by 25 basis points and maintain the neutral stance of monetary policy
3. The minutes of the MPC’s meeting will be published by April 18. The next meeting is scheduled from June 3 to 6, 2019.