BackRBI goes beyond rates to make loans cheaper
Cash reserve ratio norms eased for new retail loans to improve credit flowMPC projected economic growth for FY21 at 6%— in the range of 5.5-6% in the first half and 6.2% in the third quarter
PremiumThe Reserve Bank of India (RBI) stepped in to do the heavy lifting to revive the economy, after the Union budget appeared to have few measures to spur credit growth and boost demand.
On Thursday, the central bank introduced a direct incentive framework to boost credit growth, even as the six-member monetary policy committee (MPC) kept benchmark rates unchanged because of uncertainty in the inflation outlook.
“While this (MPC) decision may be on expected lines and widely discounted, it is important not to discount the Reserve Bank of India," governor Shaktikanta Das said. “It has to be kept in mind that the central bank has several instruments at its command that it can deploy to address the challenges the Indian economy faces."
To improve credit flow, RBI temporarily removed the cash reserve ratio (CRR)—which requires banks to set aside 4% of their deposits—for every new retail loan made to finance automobiles, homes, and to small businesses. This move, while making it attractive for banks to lend to retail and small businesses, essentially translates into a short-term cut in cash reserve ratio. This scheme will be available for new loans given till 31 July.
In addition, the central bank will now conduct one-year and three-year term repo auctions to inject up to ₹1 trillion into the banking system, giving lenders the opportunity to raise money at current rates.
When viewed in the context of elevated headline inflationary pressures, this is another incentive for banks to lock medium-term funding at current low rates.
“This should encourage banks to undertake maturity transformation smoothly and seamlessly so as to augment credit flows to productive sectors," the statement read.
The central bank has introduced these growth-inducing measures after MPC, in a unanimous decision, left policy rates unchanged for the second straight time.
“This was more of a credit policy than monetary policy," said Gaurav Kapoor, chief economist at IndusInd Bank. “Monetary policy’s effectiveness in driving credit and overall growth is limited, keeping in mind the inflation is high. It needed some direct measures to ensure credit reaches to the sectors where there is appetite and requirement."
The repo rate, the rate at which banks borrow from RBI, remained unchanged at 5.15%. This is in line with the results of a Mint survey, which showed that bankers and economists expect no change in policy. RBI had cut policy rates by 135 basis points in 2019.
“The MPC recognizes that there is policy space available for future action. The path of inflation is, however, elevated and on a rising trajectory through Q4:2019-20. The outlook for inflation is highly uncertain at this juncture. On the other hand, economic activity remains subdued and the few indicators that have moved up recently are yet to gain traction in a more broad-based manner," said the policy statement.
Given the uncertainty, MPC pegged consumer price inflation for the first half of FY21 at 5-5.4% as compared to 3.8-4% earlier. For the third quarter of FY21, the forecast stands at 3.2% with risks broadly balanced. According to the committee, the recent increase in prices of milk, pulses and crude oil are likely to weigh on inflation.
MPC also noted that the inflation trajectory will be determined by several factors, including the pass-through of telecom charges, increase in prices of drugs and pharmaceuticals and the impact of new emission norms.
“The MPC anticipates that the combination of these factors may keep headline inflation elevated in the short-run, at least through H1:2020-21. Overall, the inflation outlook remains highly uncertain. Accordingly, the MPC will remain vigilant about the potential generalisation of inflationary pressures as several of the underlying factors cited earlier appear to be operating in concert," read the statement.
MPC projected economic growth for fiscal 2021 at 6%—in the range of 5.5-6% in the first half and 6.2% in the third quarter. This is in line with its past GDP growth projections and that of the Economic Survey, which has pegged growth at 6-6.5%. The committee noted that the economy continues to be weak and the output gap remains negative.
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