Bond yields dropped over 10 basis points and could fall more in the coming days to price in more cuts. Also, the central bank would continue to absorb supply through open market operations. “The RBI is opportunistic, taking advantage of lower US yields, a weaker USD and low prices, to try and boost flagging growth. With guidance on the dovish side, the probability of further cuts is significant and will likely drive yields lower," said Eugene Leow, rates strategist at DBS Bank.
But all this isn’t entirely surprising, especially after the weak fourth quarter economic growth data that was released last week, which showed India’s growth rates have dropped to a five-year low. A distressed rural sector, slowing manufacturing and the beginnings of a consumer demand slowdown led to a dismal 5.8% growth for the March quarter.
Das has indicated that the central bank’s main concern now is growth. “The MPC notes that growth impulses have weakened significantly as reflected in a further widening of the output gap compared to the April 2019 policy. A sharp slowdown in investment activity along with a continuing moderation in private consumption growth is a matter of concern," the MPC’s policy statement read.
RBI’s officially mandated target of 4% retail inflation is almost certain to be met in FY20. Granted, food prices could surge faster than expected, but the sobering growth locally and globally could keep core inflation in check. Core inflation has been falling consistently over the past seven months anyway. Hence, RBI has forecast that retail inflation could rise marginally in the first half, but would still average below 4% in the current year.
What’s more, RBI said, “The headline inflation trajectory remains below the target mandated to the MPC, even after taking into account the expected transmission of the past two policy rate cuts."
As for growth, the outlook is not sanguine. Global growth is expected to slow markedly during 2019 and both the International Monetary Fund and the World Bank have cut their forecasts. Add the spurious mix of volatile financial markets, crude oil prices and the ongoing US-China trade war, there is little chance that India would be able to escape the impact through the exports and capital flow channels. That means domestic consumption has to be given a boost and considering limited fiscal space, monetary policy has to do the heavy lifting.
Growth forecasts have already been cut by many analysts, and the central bank too now expects growth in FY20 to be 7%, instead of the 7.2% it had forecasted earlier. RBI has already cut its growth forecast twice. And note that the FY19 growth of 6.8% fell below its estimate of 7.2% growth.
But the good news doesn’t end with the growth-friendly rate cut and stance. Das assured markets that RBI would do whatever it takes to alleviate the troubles of the non-banking financial companies (NBFCs). “We will ensure we have robust and functioning NBFCs. We will not hesitate to take steps to ensure financial stability is not adversely affected," he said in a press meet after the policy release.
The crisis of trust triggered in NBFCs following the series of defaults in Infrastructure Leasing and Financial Services Ltd and the long-drawn slump in real estate that has made home financiers such as Dewan Housing Finance Corp. Ltd delay their bond repayments has rattled markets. The pain has been spreading to mutual funds and even insurance companies. Lenders have been demanding help from the central bank.
Considering that a part of the growth slowdown is attributed to the fall in credit disbursals of NBFCs, the central bank’s willingness to support with certain conditions should be appreciated. RBI has announced it would spruce up its supervision of NBFCs, besides “closely monitoring" them. Of course, it remains to be seen what the exact nature of the support is—stocks of NBFCs continued to be under pressure after the policy was announced.
Even as it lowers the cost of borrowing and unclogs the liquidity pipe, RBI is willing to relook at its liquidity framework itself. This is music to the ears of banks, as an internal committee would take into account their grievances as it arrives at a framework. To the markets’ disappointment though, Das did not elaborate what the framework would look like.
Finally, RBI has taken the government at its word that the centre would not err from the path of fiscal prudence. This could be one testing point when the new finance minister Nirmala Sitharaman presents the full budget on 5 July.
As for the markets, a new liquidity framework, a strengthened supervision mechanism for non-banks, besides the budget would mean it would make for interesting times.
Harsha Jethmalani and Clifford Alvares contributed to this story.