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RBI cuts repo rate

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 4th 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 4th 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

RBI Bi-Monthly Monetary Policy Committee Meet Key Highlights
RBI Bi-Monthly Monetary Policy Committee Meet Key Highlights

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 4th 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.
RBI Policy Review

RBI Monetary Policy Highlights 7 Feb 2019

RBI bi-monthly Monetary Policy takeaways

Reserve Bank of India Monetary Policy

A RBI Policy meet took place on 7th February 2019, in which six-member Monetary Policy Committee (MPC), headed by RBI Governor Shaktikanta Das reviewed the macroeconomic and financial conditions.

What impact is this policy meet going to have? What stands are taken by the RBI? How important are these stands after the budget?

Following were the highlights of these policy meets: –

RBI Monetary Policy Highlights

1. Repo Rate Cut :
Repo Rate forms a part of the liquidity adjustment facility. The rate at which the RBI lends money to commercial banks is called repo rate. It is an instrument of monetary policy. A reduction in the repo rate helps banks get money at a cheaper rate and vice versa.
RBI has cut repo rates by 0.25% from 6.5% to 6.25%. RBI has stood up to the expectations of the government.
Normally, everyone agrees unanimously for a decision to be taken on certain topics. But this time voting took place and a vote count of 4:2 resulted in the decision being made in the favour of cutting the repo rate. Mr. Viral Acharya and Mr. Chetan Ghate, 2 panel members who voted for the repo rate to be not cut in this policy meet. But 4 panel members, including Mr. Shaktikanta Das who us current RBI Governor, voted for repo rate to be cut.

2.Reverse Repo Rate :
Reverse Repo Rate is the rate at which the RBI borrows money from commercial banks. Banks are always happy to lend money to the RBI since their money is in safe hands with a good interest.
It is known as the rate at which banks lend money to RBI, when the banks have surplus. Reverse repo rate is always 0.25% less than the Repo rate. Thus, now the reverse repo rate has automatically become 6%.

3.Calibrated Tightening Stand :
In the last RBI policy meet, RBI had taken a stand of calibrated tightening.
Calibrated stand means that the RBI will either maintain the repo rate or hike it but will not decrease the interest rates.
Now, the stand has been changed and Neutral Stand has been taken. Neutral stand means having the full flexibility to increase, decrease or maintain the repo rate. Everyone (all 6 panel members) agreed for this neutral stand.
(The third stand is the Dovish stand , the exact opposite of calibrated stand where in repo rates can be reduced)

4.Inflation :
In the last policy meet, RBI said that the Consumer Price Inflation (CPI) will remain between 2.7% to 3.2%. But as per the current analysis done by them, RBI says that inflation will be of 2.4%. There is a drastic fall in the inflation expectations.
In the last policy meet, RBI forecasted the inflation in April-September 2019 quarter to be 4%. Not RBI has reduced the forecast to 3.2 to 3.4%.
If they are reducing the inflation by 0.6%, then it clearly states that this not the first rate cut. There will be rate cuts in the future too. So, if you are a debt-fund investor then this good news for you.
RBI hasn’t said it, but the numbers and forecast and also the expectation built clearly indicate that they will (are) take dovish stand. In the nest policy meets, there are very high chances of rate cuts.
“The headline inflation is projected to remain soft in the near term, reflecting the current low level of inflation and benign food inflation outlook “      – RBI

5.GDP :
The projected GDP will be of 7.4% in 2019-2020. 7.2-7.4% in H1 and 7.5% in Q3 – with the risks evenly balanced. They come down from 7.5% to 7.4%, but nothing more as GDP number revisions keep happening.

6.Agricultural Loans :
This is another positive factor where the RBI has tried to make the government happy. Here, RBI and the government are in complete synch.
Agricultural loans up to Rs. 1 lakh didn’t require any collateral. This limit is now increased by Rs 60,000. That is now agricultural loans up to Rs. 1.6 lakh won’t require any collateral.
This can also be positive in the short term.

Summary :

  • The repo rate cut and neutral stand are very good signs for the industry and also a relief for the government.
  • The main thing to take from today’s RBI policy meet is the inflation target set by the RBI and the rate cuts it is indicating.
  • RBI and the government now seem to be on the same side to boost the economy by taking short term measures, rate cuts will be done. In the coming 9 months, repo rates may come down to even 5.5% to 5.75%.

Notes: –

  • The rate cut forecasts are just a prediction We are not making any final statements.
  • We are also not being pro/anti-RBI/government.

RBI Policy Highlights – 5th Dec 2018

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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.


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