RBI Monetary Policy, Shakti for loan-seekers and Analysis

Last Updated: Fri, Feb 08, 2019 18:33 hrs
Rupee

The Reserve Bank of India's Monetary Policy Committee has made a major announcement on Thursday. The RBI MPC cut key lending rates by a quarter of a percentage.

Repo rates and reverse repo rates have been reduced by 0.25%.

A Repo rate is the rate at which the RBI lends money to commercial banks. The Reverse repo rate is a rate at which RBI borrows money from other banks.

This was the first MPC announcement made after Shaktikanta Das replaced Urjit Patel as the RBI governor. Patel resigned in December 2018 citing personal reasons. During the December MPC review, interest rates remained unchanged, but the central-bank promised to cut rates if it observed upside risks to inflation not materialising.

The announcement on Thursday was the first time that a rate cut was announced since August 2017. The MPC announcement was made before noon, a major change considering such policy announcements have been usually made post 2:00 PM.

For the common man, the RBI's announcement means that loans will become cheaper. That, if banks agree to pass-on benefits to their customers. For deposit holders, however, this announcement means that the interest component would be a bit lesser. This could impact the interests of many pensioners, and deposit holders.

The RBI said that the decision to change the monetary policy stance was unanimous. The reduction in the policy repo rate however was voted 4:2. by the six-member team. Dr. Ravindra H. Dholakia, Dr. Pami Dua, Dr. Michael Debabrata Patra and Shaktikanta Das voted in favour of the decision.

Dr. Chetan Ghate and Dr. Viral V. Acharya voted to keep the policy rate unchanged.

To summarize, the RBI said that the MPC is committed to achieving medium-term target for headline inflation of 4 per cent on a durable basis.

"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," said the RBI.

Stance, Key Observations & Outlook:

In its assessment document, the RBI's MPC states that it has changed its monetary policy stance from calibrated tightening to neutral. Stance is the economic perspective or view of the Central Bank. Calibrated tightening refers to a situation wherein the RBI could increase interest rates proportionate with economic situations. Calibrated tightening can be referred as almost in sync with a hawkish stance.

The neutral stance assures that the RBI perceives the economy in a stable situation and does not see many uncertainties in the coming days. The RBI in its document has offered 19 statements in its assessment and 7 pointers that reasons why it changed its stance. Here is a look at some of the important observations:

1. Global Economic activity: The RBI MPC admits that there is a slowdown in global economy. It refers to deceleration in China, slowdown in Japan, and Crude-oil dip impacting Russian economy. It says that the Economic growth in South Africa made mild recoveries. The assessment also says that crude prices recovered in January from the lows recorded during December 2018. It also reports of a selling pressure on Base metals owing to US-China trade frictions. The report says that Gold prices have increased. This, the bank attributes to an increase in safe haven demand. The RBI note also reports of a selling spree in US equities in December as moderating. It also records that there is selling pressure on the US Dollar, although it had diminished owing to expectations on easing of trade-tensions.

2. Situation of Domestic Agriculture: Rabi sowing so far (up to February 1, 2019) has been lower than in the previous year, but the overall shortfall of 4% across various crops is expected to catch up as the season comes to a close. The lower rabi sowing reflects a deficient north-east monsoon (44% below the long period average); however, storage in major reservoirs – the main source of irrigation during the rabi season – at 44% of the full reservoir level (as on January 31, 2019) was marginally higher than in the previous year. The extended period of cold weather in this year’s winter is likely to boost wheat yields, which would partly offset the shortfall, if any, in area sown.

3. Inflation Statistics and Projections:

The central bank said that the retail inflation declined from 3.4% in Oct 2018 to 2.2% in December (lowest in previous 18 months).

Food inflation: Five constituents of the food group – vegetables, sugar, pulses, eggs and fruits, accounting for about 30 per cent of food group – were in deflation in December. Inflation in respect of other major food sub-groups – cereals, milk, and oils and fats – was subdued. Within cereals, rice prices declined for the fourth consecutive month in December. Inflation in prices of meat and fish and non-alcoholic beverages showed an uptick, while it remained sticky for prepared meals.

Inflation in the fuel and light group fell from 8.5% in October to 4.5% in December, pulled down by a sharp decline in the prices of liquefied petroleum gas (LPG), reflecting softening of international petroleum product prices.

CPI inflation excluding food and fuel decelerated to 5.6% in December from 6.2% in October, dragged down mainly by the moderation in the prices of petrol and diesel in line with the decline in international petroleum product prices.

4. Other Economic Indicators:

The RBI also assessed sale of passenger cars (indicator of urban demand) as contracting, telephone subscriber base contracting, and broadband base increasing in October.

The year-on-year (y-o-y) growth in core industries decelerated to 2.6 per cent (y-o-y) in December, pulled down by a slowdown in the production of electricity and coal; and contraction in petroleum refinery products, crude oil and fertilisers output. Capacity utilisation (CU) in the manufacturing sector, as measured by the Reserve Bank’s order books, inventory and capacity utilisation survey (OBICUS), increased to 74.8 per cent in Q2 from 73.8 per cent in Q1; seasonally adjusted CU also improved to 75.3 per cent from 74.9 per cent. While the Reserve Bank’s business assessment index of the industrial outlook survey (IOS) for Q3:2018-19 suggests a weakening of demand conditions in the manufacturing sector, the business expectations index (BEI) points to an improvement in Q4.

5. Export Growth:

The RBI statement says, "Export growth on a y-o-y basis was almost flat in November and December 2018, primarily due to a high base effect and weak global demand. While growth in exports of petroleum products remained positive, non-oil exports declined, dragged down by lower shipments of gems and jewellery, engineering goods, meat and poultry. Import growth slowed in November and turned negative in December 2018. While imports of petroleum (crude and products) rose in line with the increase in import volumes, non-oil imports such as pearls and precious stones, gold, electronic goods and transport equipment, recorded declines. The merchandise trade deficit for April-December 2018 was a shade higher than its level a year ago. Net services exports picked up in October and November 2018, which combined with low oil prices, could have a salutary impact on the current account deficit in Q3. On the financing side, net FDI flows to India during April-November 2018 were higher than a year ago. Foreign portfolio flows turned negative in January 2019, after rebounding in November and December 2018. India’s foreign exchange reserves were at US$ 400.2 billion on February 1, 2019."

OUTLOOK:

The RBI has shared the GDP estimaes from the CSO office. GDP in December was projected at 7.4% and for the first half of 2019-2020 it is at 7.5%. The RBI is confident that the risks to achieving growth have downsided. It says that the headline inflation would remain soft in the near term.

In its outlook section, the RBI talks of seven points as uncertainties that warrant careful monitoring. These are:

1. Vegetable prices have been volatile in the recent period; reversal in vegetable prices could impart upside risk to the food inflation trajectory.

2. The oil price outlook continues to be hazy.

3. A further heightening of trade tensions and geo-political uncertainties could also weigh on global growth prospects, dampening global demand and softening global commodity prices, especially oil prices.

4. The unusual spike in the prices of health and education needs to be closely watched.

5. financial markets remain volatile.

6. The monsoon outcome is assumed to be normal; any spatial or temporal variation in rainfall may alter the food inflation outlook.

7. Several proposals in the union budget for 2019-20 are likely to boost aggregate demand by raising disposable incomes, but the full effect of some of the measures is likely to materialise over a period of time.

Domestic markets closed on a negative note post the announcement. Thirty scrip sensitive BSE Sensex closed at 36,971, 4 points lower. The NSE Nifty recorded a 6 point gain to close at 11,069.40.

Here are some reactions and opinions post the RBI announcement:

Twitter Reactions:


Opinions & Thoughts:

Sujan Hajra, Chief Economist, Anand Rathi Financial Services

"The change in policy stance and rate cut are in line with expectations. We expect another 50 bps cut in 2019. We expect this to be positive for the debt market with RBI's guidance of continued OMO [Out of Market Operations]. Deposit and lending rates, however, may not correct immediately and commensurately as deposit growth rate is lagging credit growth by 500 bps."


Umesh Revankar, MD and CEO - Shriram Transport Finance Ltd

"As the inflation is under control and below 3%, we expected the central bank to reduce the repo rate.

A relief on the cost of funds is awaited eagerly by the SMEs as it helps them with reduced borrowing cost and offers much needed impetus, thereby improving their financial health. RBI’s current rate cut is indicating that in the next fiscal, if the inflation remains below 3% and oil prices remain stable, we expect rates to further reduce by ~25 bps."


Arun Thukral, MD & CEO, Axis Securities:

"Lowering of inflation targets for FY20 on account of favorable factors including benign inflation builds up the expectation of future rate cuts. The dovish stance was complimented with other positive announcements. For the NBFC sector, harmonization of risk weight guidelines by revising risk weight of 100% irrespective of credit rating to risk weight based on credit ratings will be beneficial for highly rated loan companies. Investment by Foreign Portfolio Investors in Corporate Debt which was earlier restricted to 20% to a single corporate is withdrawn to encourage a wider spectrum of investors to access the corporate debt market. Further, easing ECB policies for external borrowings, increase in the limit for non-collateral loans to farmers to 1.6 lacs from 1 lac, could be more impactful politically in election season. Such proposals among others along-with a softer stance with higher impetus on growth are in contrast to the December policy which was more hawkish in nature. Also, the new RBI governor displays more accessibility vis-a-vis his predecessor which will be taken well by corporate. Concerns of meeting the fiscal maths, however, will weigh on markets.

RBI has been continuously monitoring the liquidity situation and infusing liquidity as per requirement post the liquidity crunch arising from the DHFL/IL&FS crisis. OMO (Open market operations) has been the preferred liquidity tool in the current scenario and instead of pre-judging the liquidity required, RBI is expected to continue ensuring there is no scarcity arising in the system."


George Alexander Muthoot, MD - Muthoot Finance Limited

"The 25 bps cut is in line with our expectation which will aid the RBI to boost the liquidity in the system. The overall investment demand and the credit environment of the economy will pick up."


Khushru Jijina, MD, Piramal Capital and Housing Finance:

"The 25 bps cut in policy rates is a welcome move and in line with industry expectations as well as with central banks in advanced economies. Resulting lower cost of funds would help the NBFC sector to recover faster and its positive effects would trickle down to the larger sections of the economy namely real estate and MSMEs. NBFCs would also benefit from RBI’s decision to link bank risk weights on NBFC exposures to the rating of such instruments. This would improve flow of bank credit to the better managed NBFCs, helping segregate the men from boys. This alongwith the harmonization of Asset Finance Companies (AFC), Loan Companies, and Investment Companies, into a single category would fastrack the process of consolidation in this space, as we have been expecting for some time.

Additionally we also welcome the relaxation in FPI limits investing in corporate bonds and feel that this is the right step towards deepen the Indian debt markets."


Dhananjay Sinha, Head of Research, Emkay Global Financial Services

"The rate cut was somewhat unexpected. The rate cut decision has been justified on the back of a sharp cut in projected headline inflation by the RBI. We think the combination of reflationary budget last week along with monetary easing by the RBI will provide further boost to consumption demand. We believe the implication for inflation is somewhat on the higher side and RBi may have taken a benign view in this respect. Core inflation remains high, averaging at 6% over the past 6 months, which is significantly higher than the non-core components which is -1.4% in Dec’18. Hence, with the monetary policy decision significantly aligned to the headline inflation, the decision incorporate a larger influence of the non-core inflation. The combination of fiscal expansion and rate cut will induce upside risk to core inflation over the medium term, in our view."


Amar Ambani, President & Head of Research, YES Securities

"With an extremely benign inflation reading and limited risks to upside and with the INR having stabilized, it was it was clear to us that the time is right to provide the much-needed support to economic growth. This could also be gauged from the RBI policy announcement, where members unanimously voted in favour of changing their policy stance to Neutral from that of Calibrated Tightening. To our mind, it was only a matter of whether rates were cut in today’s meeting or the during the next policy meet of RBI. In our recent strategy note post Union Budget, we opined that while the Central Bank will take cognizance of the budgeted pause in the fiscal deficit glide, it will not hold back from cutting the Repo rate. The RBI chose to cut Repo by 25 basis points in today’s policy itself, with four members (including the Governor) favouring a rate cut while two members opted for status quo on rates. We welcome this decision and believe that the present situation opens up doors for more rate cut action in the year 2019."


Dhiraj Relli, MD & CEO, HDFC Securities:

"The RBI MPC has delighted market participants by changing stance to neutral and cutting repo rate by 25 bps. Q3FY20 inflation expectation cut to 3.9% means some more rate cuts can be expected in the course of the next few meetings. While Bond yields are yet to respond to the rate cut, we think they may start to fall materially when FPIs revise their short term view on India (overcoming their fears on fiscal situation). Equity markets could rise some more, welcoming an attempt to address recent issues in the credit markets, ultimately leading to higher growth."


B Prasanna – Head Global Markets Group, ICICI Bank

"The Monetary Policy Committee (MPC) delivered a dovish policy, both in rate action and in stance, while sounding sanguine on low inflation expectations. The sharp lowering of inflation forecasts could enable further policy easing in April. In a significant departure from previous commentaries, there was an emphasis on the need to support growth if inflation objectives are achieved and the MPC noted that the slack in the economy is rising.

The RBI has also introduced some welcome regulatory changes. The list includes withdrawal of concentration limits in corporate bonds that will promote participation of Foreign Portfolio Investors, rationalization of interest rate derivatives guidelines which will boost depth and liquidity of derivative markets, and the task force on offshore rupee markets that will foster greater participation in Indian assets. The change in risk-weighting of rated exposure to NBFCs, will help strong NBFCs to get credit thereby easing some of the strain being felt currently."


Anuj Puri, Chairman, Anarock Property Consultants:

"This is a welcome and unexpectedly positive move, given the sops that the recent expansionary budget gave to farmers at an additional cost of Rs 75,000 crore per annum. It was also overdue, as this has been the first cut in a long time. It definitely augurs well for the real estate sector which also received a budget bonanza in the previous week.

Rate cuts give a substantial push to property buyer sentiments, and it was certainly high time for such a cut. Home loan interest rates increased by as much as 5-7% in the last one year because the RBI hiked its repo rates by 50 basis points over the same period. In other words, home loans had become a more expensive proposition.

However, the real estate market does not depend only on marginally improved buyer sentiment - there are larger issues that hold the sector hostage right now. The liquidity issues post the NBFC crisis are a bigger concern. NBFCs and HFCs have seriously curtailed disbursements to developers. Moreover, the repayment capabilities of many developers are also in question.

Furthermore, though the account deficit (CAD) widened to 2.9% in December, inflation targets are more or less within control and the GDP is estimated to grow at a very healthy 7.5 % in the new fiscal. Going by these indicators, the Indian economy is looking at a good financial year ahead - always assuming that a stable government is voted to power in the upcoming general elections."


Shishir Baijal, Chairman & Managing Director, Knight Frank

"The reduction in REPO and Reverse REPO rates by the RBI by 25 BPS is a welcome move, which we hope will provide a further fillip to the demand side for real estate. As a result of this reduction, we hope that banks will pass on the benefits of the revised rates to the end consumer of loans, thereby making it easier for them to make their purchase decision. For a sector which has been suffering from poor end user demand for some time now, this is a step in the right direction."


Gururaj Bhat, CFO, Karle Group

"The reduction in key interest rates will lead to an eventual lowering in the payments for home loans. This measure can lead to an increase in demand for new home purchases as a result of lower rates of interest on loans. The price-sensitive nature of the housing sector has led to a vast number of potential home-buyers being on the fence regarding purchase decisions. This move will encourage the public to take the plunge and invest in the real-estate sector."


Foram Parekh, Fundamental Analyst - Equity, Indiabulls Ventures Ltd.

"The slash in repo rate has been positive for the bond market as the yields came down to 7.49% from yesterday’s closing of 7.56%. The RBI governor also lowered the inflation target and toned down its stance from tightening to neutral which indicates further cut down in interest rates. The bond markets were not pricing in the possibility of an immediate rate cut and as a result, G-Sec yields have dropped by ~5 bps following the policy announcement. While higher bond supply is likely to weigh on markets, the rate cut does provide some relief and the previous 10Y benchmark is likely to trade in a range of 7.35-7.50% in the near term."


Abhishek Gupta, India Economist, Bloomberg

"The RBI’s decision to cut its key rate and shift its stance to neutral from calibrated tightening puts to rest its hawkish bias. This change in policy course -- which we had expected-- points to a data-dependent policy going forward.

Thursday’s review -- the first with Governor Shaktikanta Das at the helm -- restores growth maximization as a secondary objective of the RBI. It also signals a commitment to a symmetric policy to achieve its 4% inflation target -- a departure from the RBI’s previous one-sided, conservative stance that aimed to keep inflation below the target. In our view, Das is charting a course demanded by the RBI’s mandate of price stability and growth maximization, not buckling under political pressure to rev up the economy ahead of this year’s election.

We expect the 25 basis point cut in the policy repo rate to stop an upward trend in deposit and lending rates, and allow structural reforms to support a slow, steady recovery in the economy. Inflation is likely to pick up gradually toward the 4% target. Our base-case expectation is that the RBI will now keep rates on hold until end-2019. That said, should lower oil prices counter the pickup in inflation, room for further rate cuts could open up ahead."


Rushabh Maru, Research Analyst, Anand Rathi Shares and Stock Brokers:

"As the inflation remains favourable, the RBI has cut repo rate which market was not expecting and thus the rupee appreciated. However this is a temporary phenomenon. Globally crude oil prices are rising gradually and is a matter of concern for the markets. Trade tension and geopolitical matters also remain cause of worry. Hence we expect the rupee to trade in 71-72 range in the near term with the currency continuing it's depreciation bias."


Ramji Subramaniam, MD, Sowparnika Projects and Infrastructure Pvt. Ltd:

"The RBI rate cut, after a break of 17 months is a much needed boost to the rate-sensitive sectors, especially the housing sector; this would amplify the impact of the policy measures announced during the Interim Budget for FY2019-20. With the rate of lending becoming more attractive, we expect a higher demand for loans as they become cheaper for potential homebuyers, further boosting the real estate sector."


Amit B. Wadhwani, Co-founder, Sai Estate Consultants Chembur Pvt Ltd:

"The sentiment for the real estate industry has seen an upward ‘interest’ surge post the Interim budget proposals favouring the home buyers as well as the developers. The cut in repo rate in today’s policy announcement will act as a catalyst in reviving the real estate sector which was crippled with the financial crunch in the system. The banking regulator’s plans of injecting durable liquidity will push money in the banking system, ensuring a rise in loans at better rates for the homebuyers as well as developers. This will play a large role in bringing an equilibrium in the demand and supply economics of the Indian real estate industry. The recently proposed income tax structure and rebate schemes will increase the disposable incomes and hence incremental savings by the middle-income group which will bring in the sales velocity by them buying more home assets."


Pushkar Mukewar, Co-Founder and Co-CEO of Drip Capital:

"The RBI announcement of a 25 basis point cut in the repo rate should result in interest rates easing up. Historically, banks have not tweaked lending rates to mirror repo rate cuts. Digital lending platforms, usually outside the formal banking system, are more flexible and can reflect such rate cuts sooner. This could lead to increased digital lending. But it's important to remember that such platforms are relatively new and we need to understand how they react to macro fiscal announcements before we can comment on the impact of such steps."


Rohit Poddar, Managing Director Poddar Housing and Development Ltd

"The reduction in the repo rate was expected given lower inflation numbers and to stimulate growth in an election year. The cut down of repo rate has changed the current calibrated tightening to a neutral stance."

The next meeting of the MPC is scheduled from April 2 to 4, 2019. Click here to read RBI's detailed press release.

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