A file photo of RBI Governor Shaktikanta Das. (PTI)
A file photo of RBI Governor Shaktikanta Das. (PTI)

RBI Monetary Policy Highlights: Rate cut by 25 bps, policy stance changed

  • RBI MPC cuts repo rate by 25 basis points to 5.75% with immediate effect
  • RBI has also changed policy stance from neutral to accommodative

NEW DELHI : For the third time in a row, the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) today cut interest rates by 25 basis points, as was widely expected.

At the end of a three-day MPC meeting, RBI Governor Shaktikanta Das announced its second bi-monthly monetary policy statement for 2019-20. In a unanimous decision, the MPC also decided to change the stance of monetary policy from neutral to accommodative.

Amid slowing economic growth and rising global uncertainty, the RBI had decreased the short-term lending rate (repo rate) by 25 basis points each in its last two policy reviews.

Top highlights from RBI's monetary policy:

Sovereign bonds rallied in India, sending benchmark yields to their lowest since November 2017, after the central bank cut its key rate and left the door open for more policy easing to shore up a sagging economy. The rupee held losses, while stocks extended declines.

-Home and car buyers would be hoping for cheaper loans from banks after the Reserve Bank of India today cut key policy rates for the third time in a row.

-A reduction in policy rates will come with a reduction in market yields even if the transmission to the real economy via lower lending rates from the banking system may take some time.

-"Low inflation and subdued growth are the drivers of the move. Yet, the real concern is lack of transmission of rate cuts into effective lending rate. Liquidity conditions also remain tight for large part of the corporate sector. Effective transmission and adequate liquidity remain key challenges": Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares & Stock Brokers.

-A reduction in interest rates will affect different types of debt funds differently depending upon their portfolio. Not all debt funds react similarly to a fall in market yields.

-The RBI rate cut is expected to bring down EMIs on home and auto loans, and reduce the debt repayment burden on corporates. In all, the central bank has reduced the benchmark lending rate by 0.75 percentage point since February this year.

-The benchmark BSE Sensex was trading 333.32 points, or 0.83 per cent, lower at 39,750.22, and the broader Nifty fell 114.35 points, or 0.95 per cent, to 11,907.30.

-The Governor’s assurance that adequate liquidity will be provided will ensure that the present surplus liquidity situation will sustain: Dr. VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

-Expect government to remain broadly fiscal-prudent: RBI Governor

-RBI will issue a revised circular on NPA classification in the next 3-4 days.

-RBI says a change in stance to accomodative means that a rate increase is off the table.

-Elara Capital's economist Garima Kapoor said a shift in the stance to accommodative is welcome as it will pave way for transmission to lending rates, which so far have been inadequate. "We expect MPC to cut rates by an additional 50 bps through the year while continuing to fine tune liquidity support through a combination of OMO purchases, forex swap and CRR cut," she said.

-RBI said there is a case for more players in the Small Finance Bank sector. RBI will issue draft guidelines for ‘on tap’ licensing of small finance banks by the end of August 2019.

- RBI MPC projects upward bias in food inflation in near term due to rising prices of food items.

-To promote digital transactions, RBI has decided to waive off RTGS and NEFT charges.

-On NBFC crisis, Shaktikanta Das assures that action will be taken whenever required.

-RBI Governor Shaktikanta Das said a committee will be formed to look into ATM charges.

-Rupa Rege Nitsure, chief economist, L&T Financial Holdings, said, "Today's policy actions are perfect and give a clear signal that the RBI will continue with easy monetary conditions until it sees a definite improvement in growth-inflation mix."

-Risks around the baseline inflation trajectory emanate from uncertainties relating to the monsoon, unseasonal spikes in vegetable prices, international fuel prices and their pass-through to domestic prices, geo-political tensions, financial market volatility and the fiscal scenario, RBI said.

-Devendra Pant, chief economist, India Ratings, said the rate cut shows that with inflation below RBI's target of 4%, growth concerns have come to the forefront. "By changing its stance, the RBI has communicated to the market that the growth slowdown is real," Pant said.

-RBI Governor Shaktikanta Das said they will ensure that adequate liquidity is there in the system.

-“The change in stance and downgrading of growth forecasts suggest they are leaving the door open for further loosening," said Shilan Shah, India economist at Capital Economics in Singapore. “I wouldn’t be surprised to see a further one or two cuts in the next six months."

-Expressing concern on a sharp slowdown in investment activity along with a continuing moderation in private consumption growth, the MPC said growth impulses have weakened significantly as reflected in a further widening of the output gap compared to the April 2019 policy.

-"Interest rates on longer tenor money market instruments remained broadly aligned with the overnight WACR, reflecting near full transmission of the reduction in policy rate," the RBI report said.

-On transmission of rate cuts, RBI noted that the transmission of cumulative reduction of 50 bps in the policy repo rate in February and April this year was 21 bps to the weighted average lending rate (WALR) on fresh rupee loans.

-Inflation expectations of households in the May 2019 round of Reserve Bank’s survey declined by 20 basis points for the three-month ahead horizon compared with the previous round, but remained unchanged for the one-year ahead horizon.

-RBI has revised consumer price inflation forecast for the first half of fiscal year 2019-20 to 3-3.1% from 2.9-3% earlier, while the projection for the second half stands revised to 3.4-3.7% from 3.5-3.8% earlier.

-The MPC revised both its growth and inflation forecasts for the current fiscal. GDP growth has been revised downwards to 7% from the earlier projection of 7.2%. The MPC expects growth in in the range of 6.4-6.7% in the first half of FY20 and 7.2-7.5% in the second half.

-The minutes of the MPC’s meeting will be published by June 20.

-The next meeting of the MPC is scheduled during August 5 to 7.

-All members of the MPC (Dr. Chetan Ghate, Dr. Pami Dua, Dr. Ravindra H. Dholakia, Dr. Michael Debabrata Patra, Dr. Viral V. Acharya and Shaktikanta Das) unanimously decided to reduce the policy repo rate by 25 basis and change the stance of monetary policy from neutral to accommodative.

-The reverse repo rate under the LAF stands adjusted to 5.50%, and the marginal standing facility (MSF) rate and the Bank Rate to 6%.

-RBI said 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.

-The benchmark equity indices Sensex and Nifty was trading negative since the beginning of the day as investors were cautious ahead of the RBI monetary policy. Sensex was down 150.69 points, or 0.38%, at 39,932.85 while the broader Nifty was trading at 11,955.30 falling 66.35%, or 0.55%.

-RBI's policy statement is followed shortly after by a press conference with the central bank governor and his deputies. The RBI also releases minutes of each meeting within two weeks of the event, disclosing how each member voted and why.

-The last time the RBI had to cut rates three times in a row was in 2013.

-At a forum in Washington in April, RBI Governor Shaktikanta Das had said that central banks could be more flexible in the size of rate adjustments, rather than sticking to the usual moves of 25 basis points.

-Goldman Sachs sees the RBI increasing interest rates next year - one hike of 25 basis points each in first quarter and second quarter of 2020.

-Even as the RBI has decreased the repo rate by 50 basis points to 6% since February, bank lending rates, on an average, have declined by only 5 basis points.

-Rating agency Icra expects the RBI to maintain a status quo in its monetary policy review. The agency said the central bank would adopt a wait and watch approach till the new finance minister Nirmala Sitharaman presents her first Budget on July 5.

-A recent report by SBI had advocated that RBI must go for a rate cut bigger than the widely-expected 25 basis points keeping in mind the current slowdown in the Indian economy.

-Most economists expect the RBI to cut repo rate by 25 basis points to 5.75%. Two-thirds of 66 economists polled by Reuters expect the MPC to wrap up on Thursday by cutting the repo rate by 25 basis points. Bloomberg said 31 of 43 economists it surveyed expect a 25 bps rate cut.

-At least three economists out of 43 surveyed by Bloomberg are penciling in a 50 basis points cut.

-Bank of America Merrill Lynch economist Indranil Sen Gupta, known for his contrarian calls in the past, is expecting that the RBI will lower its benchmark interest rate by 35 basis points.

-India Ratings has warned that rate cut is unlikely to stimulate demand in the near term due to the absence of quick resonance in the financial market.

-Apart from its likely rate cut, the RBI will have to tackle issues surrounding sluggish monetary policy transmission. Despite lowering rates by 50 basis points this year, bank lending costs have been rather sticky amid tighter liquidity. Those conditions, though, are showing nascent signs of easing.

-Kunal Kundu of Societe Generale SA is predicting a 50 basis-point reduction.

-Today's policy review will be RBI's first after the results of 2019 Lok Sabha elections.

-Uday Kotak, Managing Director of Kotak Mahindra Bank, opines that the RBI should reduce interest rates in view of the slowing economy. He however warned that the real challenge is to ensure transmission of the rate cut across deposit and lending rates.

-CII Director General Chandrajit Banerjee said the central bank needs to continue lowering interest rates in order to provide a stimulus to the economy.

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