With an eye on addressing economic growth concerns and kick-starting private investments, the Reserve Bank of India on Wednesday announced an unconventional 35-basis-point cut in the repo rate.
This is a shift away from the convention of effecting rate changes in multiples of 25 basis points (bps). The central bank also unveiled a host of measures to boost consumer credit and enhance credit flow to non-banking finance companies.
While emphasising that there is nothing sacrosanct about rate action being only in multiples of 25 bps, RBI Governor Shaktikanta Das said: “In view of the evolving economic situation and MPC’s assessment about demand and investment, it was felt that a 25 bps cut was inadequate. But a 50 bps cut would have been excessive. That is why a balanced call was taken. So, keeping in mind the requirement of the economy, the MPC has taken the decision unanimously to reduce the policy repo rate.”
While all six members of the Monetary Policy Committee (MPC) voted unanimously to reduce the policy repo rate, four voted for a 35 bps cut and two for 25 bps. All the members voted to maintain the accommodative stance of the monetary policy.
Following the rate cut, the repo rate is now at 5.40 per cent against 5.75 per cent earlier.
Benign inflation outlook
From February 2019 till date, the RBI has cumulatively cut the repo rate by 110 bps. The benign inflation outlook provides headroom for policy action, the RBI said in a statement.
Referring to banks reducing interest rates on fresh rupee loans by only 29 bps during the February to June 2019 period when the repo rate was cut by 75 bps, Das observed that the banking system is flush with liquidity. Hence, the rate cuts effected by the RBI and the liquidity which it has injected together have now initiated the cycle of rate cuts vis-a-vis fresh loans from banks.
To give a leg up to consumer credit, including personal loans but excluding credit card receivables, the RBI cut the risk weight on the segment from 125 per cent to 100 per cent. What this means is that lenders will need to set aside relatively less capital to make such loans. To help NBFCs overcome liquidity issues, the central bank has decided to raise the limit of a bank’s exposure to a single NBFC to 20 per cent of the Tier-I capital against 15 per cent now.
The RBI has allowed, subject to certain conditions, their lending to the latter (other than microfinance institutions) for onward-lending to agriculture, micro and small enterprises and housing, to be classified as priority sector lending. This move is aimed at encouraging banks to lend to the NBFCs.
GDP and inflation
The MPC has revised downwards the projection of real GDP growth to 6.9 per cent for 2019-20 against 7 per cent quoted in its June resolution.
Das said the downward adjustment in the GDP growth projection was warranted by various high-frequency indicators pointing to weakening of both domestic and external demand conditions.
The MPC has retained its inflation projection at 3.1 per cent for Q2 (July-September) 2019-20 and has revised the projection for H2 2019-20 (April-September) to 3.5-3.7 per cent, with risks evenly balanced, from 3.4-3.7 per cent projected in June.
Read:The third bi-monthly monetary policy statement 2019-20