RBI stays neutral, slashes repo rates, confident on controlling inflation, monsoon and other risks

Last Updated: Thu, Apr 04, 2019 13:18 hrs
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Mumbai: Repo rates, the rates at which banks are lent money by the Reserve Bank have been slashed. On Thursday, the Reserve Bank's Monetary Policy Committee announced a drop of 0.25% or 25 basis points in the repo rates.

"Consequently, the reverse repo rate under the LAF stands adjusted to 5.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 6.25 per cent," read a policy note on the Apex bank's website.

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.

The latest rate-cut favoured by the six member Monetary Policy Committee is the second such rate cut that has been effected in the tenure of Governor Shaktikanta Das.

The committee voted 4-2 in favour of rate slashing. Dr. Chetan Ghate and Dr Viral Acharya voted to keep policy rates unchanged, while Dr. Pami Dua, Dr. Ravindra H. Dholakia, Dr. Michael Debabrata Patra and Shri Shaktikanta Das voted in favour of a reduction.

Alongside the rate slash, the RBI has maintained a neutral stance for its monetary policy stance. This stance was voted 5-1 with only Dr. Dholakia voting against a neutral stance.

In its previous committee meeting, the MPC had slashed key lending rates by a quarter of a percentage. More on that here.

The committee made observations on domestic and international economy on 2nd and 3rd April and concluded the meet on Thursday.

GDP growth for 2019-20 in the February policy was projected at 7.4 per cent in the range of 7.2-7.4 per cent in H1, and 7.5 per cent in Q3 – with risks evenly balanced.

The RBI MPC factored in several considerations including input and output producers polled in an RBI survey factors to document inflation numbers. The RBI also assumed a normal monsoon in 2019. The RBI MPC says the path of CPI inflation has been revised downwards to 2.4% in fourth quarter of FY19, 2.9-3.0% in first half of FY20 and 3.5-3.8% in second half of FY20, with risks broadly balanced.

Here are some of the key observations, the MPC addressed for its decision:

Global Economy: The MPC observed that global economic activity had lost pace since the MPC's last meeting in Feb 2019. "The Chinese economy decelerated in Q4:2018 on subdued domestic and global demand impacting industrial activity," read the MPC release.

Crude Oil: The MPC noted that Crude oil prices had risen owing to production cuts by OPEC and Russia. It also cited disruption in supplies owing to US sanctions on exports from Venezuela.

Currency & Gold Markets: The MPC noted that Gold prices weakened on expectations of positive outcomes of the China-US trade deal. The MPC observed that the US dollar had traded with an appreciating bias in recent weeks.

Foreign Markets: Monetary policy stance of key central banks and crude price movement had affected financial markets. The MPC observed selling pressure in US markets in last week of March on account of economic data. It also noted that equity markets in EMEs gained, benefitting from country-specific factors and easing of global financing conditions. Speaking about Bond yields, the MPC observed Bond yields in US softening. In Germany and Japan bond yields slipped into negative territory. "Bond yields in most EMEs have been falling in tandem with those in AEs and on the improving inflation outlook," it said.

DOMESTIC ECONOMY:

Overview:

The MPC cited CSO' (Central Statistics Office) data that GDP advanced estimates had gone down from 7.2 to 7.0 in Feb 2019. Domestic economic activity decelerated for the third consecutive quarter in Q3:2018-19 due to a slowdown in consumption, both public and private.

Advance estimates for foodgrain production in 2018-19 was estimated at 281.4 million tonnes, 1.2% lower than fourth estimates for FY18. Manufacturing component of the index of industrial production (IIP) growth slowed down to 1.3 per cent in January 2019 due to automobiles, pharmaceuticals, and machinery and equipment. Growth of eight core industries remained sluggish in February.

Inflation: expectations, measured by the Reserve Bank’s survey of households, declined in the February round over the previous round by 40 basis points each for the three months ahead and for the one year ahead horizons. Firms participating in the Reserve Bank’s industrial outlook survey of manufacturing companies reported reduction in input price pressures, but they expected an increase in staff expenses in Q1:2019-20. Farm and industrial input costs increased at a slow pace in Jan-Feb 2019.

The RBI observed that Retail inflation, measured by y-o-y change in the CPI, rose to 2.6 per cent in February after four months of continuous decline. Inflation in the fuel and light sub-group collapsed from 4.5 per cent in December to 1.2 percent in February. Prices of liquefied petroleum gas (LPG) declined sharply, pulled down by the lagged impact of the softening of international energy prices. CPI inflation excluding food and fuel declined to 5.2 per cent in January, but rose to 5.4 percent in February, driven by a broad-based pick-up in inflation in the personal care and effects, and recreation and amusement sub-groups.

Liquidity: Consequently, total durable liquidity injected by the Reserve Bank through OMOs aggregated Rs 2,98,500 crore (Rs 2,985 billion) for 2018-19. Liquidity injected under the LAF, on an average daily net basis, was Rs 95,003 crore (Rs 950 billion) during February (February 7-28, 2019) and Rs 57,043 crore (Rs 570 billion) in March.

Export growth: remained weak in January and February 2019 mainly due to exports of petroleum products decelerating in response to a fall in international crude oil prices. Among non-oil exports, engineering goods, chemicals, leather and marine products recorded either sequentially lower or negative growth.

Outlook:

The RBI MPC cited several uncertainties that cloud the inflation outlook. The risks that the RBI has mentioned includes domestic and global demand-supply balance of key food items, a suggestion on probability of El Nino effects in 2019. There is also a risk of abrupt reversal in vegetable prices, especially during the summer months.

Other risks includes uncertainties such as demand conditions, resolution of trade tensions, a pick-up in global demand that could likely push up oil prices, and volatility in financial markets. The RBI attributes volatility in financial markets as reflecting in part global growth and trade uncertainty, which may have an influence on the inflation outlook.

Mythili Bhusnurmath of the Economic Times asked the Governor during the RBI's post-announcement Press Conference if the MPC assessed the current political situation as a risk and the spate of RBI circulars being challenged in courts. Governor Shaktikanta Das did not share an answer to the first question on political situation or the hypothetical eventuality of a hung Parliament, but elaborating on circulars being appealed, he said it was a democratic right of citizens to do so. He also emphasized the RBI was no exception to being questioned in a court of law.

Speaking about the recent Supreme Court judgement on the RBI's circular on NPA dated Feb' 2018, the Governor said that the RBI was committed to resolution of stressed assets and credit discpline. The RBI is expected to come up with a revised circular. The Governor did not clarify the timeline on this, but said that there will not be any undue delay in the new circular.

Although this has been the second consistent rate cut since Governor Das assumed charge, observers have claimed that actual rates by banks have not seen a major change or in sync with RBI's rate cuts. The Governor himself shared data to this extent, saying 10 basis point cut in lending rates had been observed.

He said that meetings with banks has been undertaken to further increase rate cuts.

The announcement is expected to make loans cheaper, that if the banks offer significant rate-cuts. Deposit holders may find their returns declining with interest rates being chopped.

In terms of effects, the thirty scrip BSE Sensex gained by 160 points quickly post the announcement during the intra-day session on Thursday. The Sensex at 1:00 PM recorded a marginal gain of 20 points from the day's opening.

To access the original RBI MPC document, click here. Opens in new tab and takes you to the RBI site.