RBI Cuts Repo Rate By 35bps to 5.40% | RBI Monetary Policy Review Aug 2019

RBI Monetary Policy Meet Highlights (7th August, 2019)

Introduction

Reserve Bank of India, RBI cuts repo rate by 35bps to 5.40% from 5.75% on 7^th August 2019. RBI also decided to maintain the accommodative stance of monetary policy and lowered GDP growth forecast to 6.9% from 7%, in its third Bi-monthly monetary policy meet of the financial year 2019-20.

RBI Cuts Repo Rate By 35bps to 5.40% – MPC Meet Key Highlights

• On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting on 7th August, 2019 decided to reduce the policy repo rate by 35 basis points to 5.40% from 5.75%with immediate effect.
• The MPC also decided to maintain the accommodative stance of monetary policy.
• These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth.

Key HIghlights of RBI’s Bi-Monthly Monetary Policy meet

1.RBI cuts Repo Rate by 35bps to 5.40%

• RBI cuts repo rate by 35 basis points to 5.40% from 5.75% with immediate effect. Consequently, the reverse repo rate adjusted to 5.15% and the marginal standing facility (MSF) rate and the Bank Rate to 5.65%.
• This is the fourth cut in a row since Shaktikanta Das took over as the governor in December 2018. RBI had cut the policy rate by 75 basis points prior to this, through 3 rate cuts of 25 bps each in February, April and June MPC meet.
• All members of the MPC unanimously voted to reduce the policy repo rate and to maintain the accommodative stance of monetary policy. 4 members (Dr. Ravindra H. Dholakia, Dr. Michael Debabrata Patra, Shri Bibhu Prasad Kanungo and Shri Shaktikanta Das) voted to reduce the policy repo rate by 35 basis points, while 2 members (Dr. Chetan Ghate and Dr. Pami Dua) voted to reduce the policy repo rate by 25 basis points.

2.Accomodative Stance of Monetary Policy

• The Monetary Policy Committee (MPC) also decided to maintain the accommodative stance of monetary policy. It is prudent to remain accomodative as stated by MPC. In the second bi-monthly policy review held in June 2019, MPC had changed the monetary policy stance from neutral to accomodative.
• A significant weakening of growth impulse, slowdown in investment activity and a continuous moderation in private consumption growth is a matter of concern, as noted by MPC.
• On account of the slowdown in the above mentioned macroeconomic indicators, RBI sees scope to accommodate growth by supporting efforts to boost demand and re-energize the private investment activity.

3.Growth (GDP) Forecast

• GDP growth for 2019-20 is revised downwards from 7% in the June policy to 6.9% on account of weakening of both domestic and external demand conditions.
• It is revised in the range of 5.8%-6.6% for H1:2019-20 (April to September FY2019-20) and 7.3%-7.5% for H2 (September 2019 to March 2020) – with risks somewhat tilted to the downside. While, GDP growth for Q1:2020-21 is projected at 7.4%.
• 5.8-6.6% for H1:2019-20 : As per RBI’s industrial outlook survey, the demand conditions in Q2 FY20 seem to have muted expansion in demand conditions. weakening of both domestic and external demand conditions
• 7.3%-7.5% for H2:2019-20 : The impact of monetary policy easing since February 2019 is expected to support economic activity in second half of FY2019-20. High capacity utilisation, higher financial flows to the commercial sector, measures to enhance flow of credit to NBFCs are the positive sides which are promising for good investment activity. Moreover, base effects will turn favourable in H2:2019-20.

4.Revision in CPI Inflation

• RBI has revised Consumer Price Index (CPI) inflation 3.1% for Q2:2019-20 and 3.5-3.7% for H2:2019-20, with risks evenly balanced. CPI inflation for Q1:2020-21 is projected at 3.6%.
• Following are the key driving factors which are taken into consideration by MPC for the revision in CPI forecast :
  1. Impact of recent policy rate cuts
  2. Rise in food inflation driven by uneven temporal monsoon in 2019
  3. Volatile crude oil prices due to geo-political tensions in middle-east
  4. Ease in the output prices by the manufacturing firms as stated in the industrial outlook
• A revival in monsoon has dampened agflation (Agriculture Inflation) fears, as it halved seasonal rainfall deficit to 7% of normal from 14% as on July 28. 

5.Transmission Process

• The success of the accommodative policy would depend entirely on the next level of its application, that is, the transmission of the lower rates to the ultimate borrowers. Thus the key determining factor of expected favourable results of repo rate cut by RBI is the effective cascading of the benefits of lower base rate by the banks. 
• In simple words, 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.
• The rate cut has sent a strong signal to domestic banks to cut lending rates before the festive season kicks off in September. 
• The transmission of policy repo rate cuts to the weighted average lending rates (WALRs) on fresh rupee loans of banks has improved marginally since the last meeting of the MPC. Overall, banks reduced their WALR on fresh rupee loans by 29 bps during the current easing phase so far (February-June 2019).

Enhanced Credit Flows to NBFC Sector

• RBI has taken several measures to facilitate credit flow to the well managed NBFCs or HFCs during the last one year.
• MPC has declared to raise a bank’s exposure limit to a single NBFC to 20% of Tier-I capital of the bank from earlier limit of 15%.
• The minimum holding period for assets to be securitised or assigned was reduced from one year to six months, thereby enabling the NBFCs and HFCs to raise funds by securitising their originations without having to wait for a longer period.
• The durable liquidity in the system was increased through a series of OMOs and Forex SWAPs.
• MPC has decided to reduce the risk weight for consumer credit, including personal loans, but excluding credit card receivables, to 100% from 125%.

Measures to Boost Payments System

• RBI will set up central payment fraud registry for tracking payment system frauds.
• National Electronic Funds Transfer (NEFT) services to be active 24×7 from December from the current timings of 8.00 am to 7.00 pm on all working days (including 1st, 3rd and 5th Saturdays in a month)
• Expansion of Biller categories for Bharat Bill Payment System : 
  1. BPPS is an interoperable platform for repetitive bill payments and currently covers 5 segments : direct-to-home (DTH), electricity, gas, telecom and water bills. MPC has decided to permit all categories of billers, except prepaid recharges, who provide for recurring bill payments to participate in BBPS on a voluntary basis.
  2. Apart from digitisation of cash-based bill payments, these segments would also benefit from the standardised bill payment experience for customers, centralised customer grievance redressal mechanism and prescribed customer convenience fee.
• In order to minimise the concentrated risk in retail payment system, to benefit from diversification of risk and also to encourage innovation and competition, RBI decided to offer ‘on tap’ authorisation to entities desirous to function/operate/provide platforms for :
  1. Bharat Bill Payment Operating Unit (BBPOU);
  2. Trade Receivables Discounting System (TReDS); and
  3. White Label ATMs (WLAs).

Summary

• On account of US Fed’s July 31 rate cut Global rates are cycling down. Oil and commodity prices are also slipping on global uncertainty. The domestic inflation outlook remains liberal.
• Domestic economic activity continues to be weak, with the global slowdown and escalating trade tensions posing downside risks. Private consumption, the mainstay of aggregate demand, and investment activity remained sluggish.
• Even as past rate cuts are being gradually transmitted to the real economy, the liberal inflation outlook provides headroom for policy action to close the negative output gap.
• The growth concerns are addressed by MPC by boosting aggregate demand, especially private investment, assumes the highest priority at this juncture while remaining consistent with the inflation mandate (4% within a band of +/- 2%).
• The minutes of the MPC’s meeting will be published by August 21, 2019. The next meeting of the MPC is scheduled during October 1,3 and 4, 2019.