Shaktikanta opens account with a surprise rate cut

Shaktikanta Das’ maiden credit policy as Governor of the Reserve Bank of India has brought cheer to India Inc, the middle class, farmers and the non-banking financial sector.

The Reserve Bank of India, on Thursday, came up with a surprise 25 basis points repo rate cut in addition to a widely-expected change in the monetary policy stance to ‘neutral’ from the earlier stance of ‘calibrated tightening’.

ANALYSIS: Despite RBI’s rate cut, deposit and lending rates are unlikely to come down in a hurry

A benign inflation outlook coupled with the need to strengthen private investment activity seems to have prompted the move. This should cheer the trade and industry, which have been hankering for a rate cut in view of the high finance costs. The six-member monetary policy committee (MPC), by a 4:2 majority, voted to reduce the policy repo rate (the interest rate at which the RBI provides liquidity to banks to overcome short-term mismatches) from 6.50 per cent to 6.25 per cent.

Announcing his first monetary policy review, Das said: “It is noteworthy that the path of inflation has moved downwards significantly, with headline inflation in the next one year expected to remain contained below or at its target of 4 per cent. This has opened up space for policy action.”

Das said that the favourable macroeconomic condition that is evolving underscored the need to act now when it is most opportune.

The move appears to complement the Centre’s interim Budget, which, among others. announced cash transfer for farmers and provided income-tax relief for small tax payers.

Pat from Goyal

Interim Finance Minister Piyush Goyal said in a tweet: “RBI’s decision to reduce the repo rate by 25 basis points from 6.5 per cent to 6.25 per cent and the change of stance to ‘Neutral’ will give a boost to the economy, lead to affordable credit for small businesses, homebuyers etc. and further boost employment opportunities.”

Radhika Rao, Economist and Eugene Leow, Rates Strategist, DBS Group Research, observed that the Governor’s remarks that “there is room to cut” were telling. “We see a shallow rate-cut cycle ahead. We revise our call to include a 25-basis points cut in April, before rates stabilise,” she said in a note.

But Anil Gupta, V-P and Sector Head, Financial Sector ratings, ICRA, observed that transmission of a cut in policy rates to banks’ lending rates may be incomplete and delayed given the slow incremental build-up in their deposits. It may be challenging for banks to push credit growth without fast-pacing their deposit base, which may require hiking the deposit rates. This could be difficult in a rate-cut cycle.

Boost for farm loans

Keeping in view the overall inflation and the rise in agriculture input costs, the RBI decided to raise the limit for collateral–free agriculture loans from ₹1 lakh to ₹1.6 lakh. This is aimed at enhancing the coverage of small and marginal farmers in the formal credit system. In a bid to enhance the flow of credit to non-banking finance companies, the RBI said rated exposures of banks to all such companies, excluding Core Investment Companies, would be risk-weighted as per the ratings assigned by the accredited rating agencies (against an uniform risk-weight of 100 per cent).

CPI and GDP revised

The MPC revised the path of CPI inflation downwards to 2.8 per cent in the fourth quarter of 2018-19, 3.2-3.4 per cent in the first half of 2019-20 and 3.9 per cent in the third quarter of 2019-20, with risks broadly balanced around the central trajectory. Das said the possibility of fiscal slippage was discussed by the MPC.