Mumbai: On Wednesday, 5th December 2019, all eyes were set on the Reserve Bank of India's monetary policy announcement. Several economists, industry leaders and financial pundits had previously predicted the RBI to announce a major policy cut.
However the Reserve Bank, to the surprise of several polls, announced a "no change".
The official news release from the RBI website read, "The policy repo rate under the liquidity adjustment facility (LAF) [remains] unchanged at 5.15 per cent..."
"Consequently, the reverse repo rate under the LAF remains unchanged at 4.90 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 5.40 per cent..."
"The MPC also decided to continue with the accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target..."
This was a unanimous decision with all members of the MPC voting in favour of no change in rates. "Dr. Chetan Ghate, Dr. Pami Dua, Dr. Ravindra H. Dholakia, Dr. Michael Debabrata Patra, Shri Bibhu Prasad Kanungo and Shri Shaktikanta Das – voted in favour of the decision."
Governor Shaktikanta Das was quoted as saying in media reports, "We cannot be mechanically cutting rates every time, need to wait for the government and RBI measures to play out."
A detailed announcement or the minutes of the MPC meeting will be made available on Dec 19, the first press release is available here
Among the major observations, the MPC noted,
• Global Economy: Major global economies as picking steam although they remained subdued. Shared the examples of US economy picking up for the third quarter. It also noted that economies in China, South Africa and Brazil losing steam. "Inflation remained benign in major AEs and EMEs in Q3, except in China where it firmed up to its highest level in eight years," said the MPC note.
• Domestic Economy: The RBI observed pertinent points- contracting GDP, de-accelerating GVA (gross value added), slower than estimated exports, contraction in several crucial sectors including a weak service sector and a rising retail inflation. The MPC also noted "food inflation spiked to 6.9 per cent in October – a 39-month high". It also added, "Prices of onions, in particular, shot up by 45.3 per cent in September and further by 19.6 per cent in October.:
• Consumer Spending: Based on the Reserve Bank’s consumer confidence survey, spending on non-essential items of consumption has shrunk compared to a year ago; however, consumers expect their overall spending to remain unchanged going forward largely due to an increase in prices.
• Liquidity: "Overall liquidity in the system remained in surplus in October and November 2019 despite an expansion of currency in circulation due to festival demand. Average daily net absorption under the LAF amounted to Rs 1,98,566 crore in October."
• Outlook: The central bank revised FY20 growth rate downwards to 5 percent. "The MPC notes that economic activity has weakened further and the output gap remains negative. However, several measures already initiated by the Government and the monetary easing undertaken by the Reserve Bank since February 2019 are gradually expected to further feed into the real economy. Data on corporate finance and on projects sanctioned by banks and financial institutions suggest some early signs of recovery in investment activity, though its sustainability needs to be watched closely."
Based on the early results, RBI said the business expectations index of the Reserve Bank’s industrial outlook survey indicates a marginal pickup in business sentiments in Q4. Meanwhile, Governor Shaktikanta Das also announced that Forex reserves jumped to a new high of $451.7 billion as on 3 December.
For India Inc, the Governor announced the formation of a self-regulatory body (SRB) as a first step towards development of secondary market for corporate loans.
A few hours ahead of the major policy announcement, the Sensex gained a few points trading up in a range of 100-120 points from the start of the session. By 11:50, a few minutes after the announcement, the Sensex slumped.
Anuj Puri Chairman at Anarock Property Consultants explained, "From a real estate point of view, a rate cuts are obviously always welcome as they help improve overall sentiment. The expected rate cut of 25 bps would have caused home loan values to fall below 8% for first time ever. However, it is also true that another rate cut alone would have been insufficient to stir housing sales significantly across budget categories. The previous rate cuts throughout 2019 had almost no perceptible impact on residential sales. In the present scenario, only the combined effect of lower interest rates coupled with other measures such as a cut in personal taxes – reportedly being considered by the FM – can actually stimulate residential sales out of their current lethargy."
Shishir Baijal, CMD at Knight Frank India said, "RBI’s decision to not lower interest rate has come as a surprise and a bit of a disappointment to the industry. Lower interest rate would have helped push up credit demand and investment in the economy, aiding overall economic growth. It would have provided much required reprieve to some ailing sectors like real estate and auto. RBI has probably taken the cautious approach of wait and watch to see the effect of past rate cuts and also to assess the inflation trajectory."
Ramesh Nair, CEO & Country-Head- India, Jones Lang La-Salle said in a note, "The central bank by keeping the rates unchanged has recognised that the need of the hour is to infuse confidence about the economic growth through a holistic approach. This will come by combining fiscal and monetary measures... The decision to maintain policy rates augurs well for the economy as the recently introduced policy reforms will take time to pan out and materialise."
Nikhil Gupta, Chief Economist with Motilal Oswal Financial Services, said, "Overall, today's status quo increases the credibility of RBI's inflation mandate. We had always believed that the cut [previous] would be the last rate cut in the cycle. We continue to maintain that there will be no more rate cuts now unless inflation falls back towards 4%. It implies that any rate cut is unlikely in the next one year"
Amit Gupta, CEO at TradingBells observed, "The market has digested most of the bad news in terms of economic slowdown and it is not showing any signs of weakness where technically, Bulls will remain on driver’s seat till Nifty trades above 11700 level while 11950 is immediate support. In the upside 12100-12150 is an immediate supply zone; above this Nifty is likely to head towards 12350/12500 levels."
In last 18-24 months,there has been secular decline in #REPO,MCLR, PLR,Call Money&Bank Rate by 100-200bps— Sanju Verma (@Sanju_Verma_) December 5, 2019
On the contrary rates for PPF,EPF,FD,NSC,NSS etc,have either been steady or risen
This dichotomy has steepened long end of #YieldCurve
RBI,undoing yield curve distortion https://t.co/zVNxM4UkUZ