RBI Policy Highlights – 5th Dec 2018

Repo Rate & Reverse Repo: – Known as the rate at which RBI lends money to the banks. Remains Unchanged at 6.5%, status quo maintained. Reverse Repo Rate, known as the rate at which banks lend money to RBI, when the banks have surplus. 0.25% less than the Repo rate, which is 6.25%

This decision of not changing the repo or reverse repo is taken by studying the current scenarios. The repo rate is maintained because no upward pressure on inflation can be seen. Also, the inflation is within the range of RBI, which is less than 4%. This is the main reason behind RBI not changing the Repo Rate.

RBI has taken stand of Calibrated Tightening (one of the three stands that can be taken): This stand means that the RBI will not decrease the interest rates, primarily repo rate. The reason behind this that RBI thinks that inflation pressure is on the upward side and not downward. Thus, they will either maintain the status quo or will keep increasing the interest rates in the next 12 months. In the policy statement, tightening stand is mentioned. But, in the press conference, Mr. Urjit Patel said that, if no upward pressure is seen on the targets of inflation, they can change the stand to ‘Neutral Stand’. Here in ‘Neutral Stand’ they can either decrease or increase the interest rates, which gives them flexibility.

Due to this ‘Calibrated Tightening Stand’, the 10-year Government Security yields have fallen from 7.55% to 7.45%.

CPI Inflation: The CPI Inflation range during the earlier policy meet was 3.9% to 4.5%, This 4.5% was breaching their upper limit of 4%, which is why they had the stance of calibrated tightening. But in this policy, the CPI inflation rage is 2.7% to 3.2%. Thus, this range is decreased by almost 1-1.2%. This is a positive sign.

The RBI is comfortable with inflation being in this range. If this range is followed, then RBI might start cutting the repo and interest rates. This will be a good sign for home loan borrowers, vehicle loan borrowers, etc as their EMI’s will go down if the above-mentioned CPI inflation range remains.

The reason behind this range is the decrease in the brent oil prices in the last 1-2 months. The brent oil prices have come down from 86 level to almost 61 level (dollar per barrel). Its an almost 30% drop in the prices. Same decrease can be seen in the prices of petrol and diesel. So, the inflation might go down over the period of next 12 months.

GDP Growth Expectations: This financial year, RBI has GDP growth expectations of 7.4%. Comparatively unchanged to their last policy meet. And for the next half of the year, that is October to March 2019, the GDP growth expectation given by RBI is 7.2% to 7.3%.

This too is a positive sign as they don’t have any negative number on their mind for their GDP calculations.

Statutory Liquidity Ratio (SLR) Cut: RBI is going to decrease the SLR by 0.25% per quarter.  So, if the current SLR rate id 19.5%, then RBI is planning to take the SLR at 18% over the period of next 6 quarters.

This will add liquidity of close to 1.5 to 2 lakh crore rupees. This liquidity is in turn going to help for the credit growth. Credit growth is nothing but the loans the bank will give to general public. All commercial banks must follow this SLR as per RBI’s prescription.

A key point made by the RBI: RBI said that they are going to link the interest rates of all kinds of loans to a specific benchmark. They have started on its process and will soon announce where they will link the interest rates.

Probably, they will link it to the repo rate. It means that whenever you take a loan the loan would be linked to the repo rate (or any other benchmark that they decide). Thus, the bank cannot change the equation between the repo rate and the margin decided by them above the repo rate.

For example, if the repo rate is at 6.5% when the loan is taken, and the bank decides that they will charge 3% more above the repo rate. Thus, the interest rate on loan would be fixed as ‘repo rate + 3%’ for the tenure of the loan. So, if the repo rate decreases to 5% the interest rate will become and 8% and if the repo rate increases to 8% then the interest rate on the loan would become 11%.

Earlier banks were manipulating the interest rates whenever the repo rates use to change. If the repo rates went up, they would increase the interest rates on loan, but would never decrease these interest rates when the repo rates went down.

This particular point is a very big positive from borrower’s perspective.