The Reserve Bank of India (RBI) on Wednesday moved for an unconventional repo rate cut by 35 basis points, the first of such magnitude by the central bank, to arrest falling economic growth while insisting that banks must now pass on the benefits to their customers. The central bank has lowered the growth projection for the current financial year to 6.9 per cent from 7 per cent earlier. It kept its inflation projection unchanged at 3.1 per cent. In response to the policy, State Bank of India (SBI), which recently lowered the deposit rates, cut its lending rate by 15 basis points across all tenors. Housing Development Finance Corp (HDFC), too, last week lowered its loan rates by 10 basis points. RBI Governor Shaktikanta Das said “all stakeholders must act together” to lift economic growth. He said while the RBI lowered rates, the government was looking at sectoral issues. The banks must now cut their lending rates, he added, though he did not say if these would be enough to encourage private companies to borrow for new projects.
The RBI has reasons to fear the slowdown, even though the governor termed it “cyclical”, because the central bank’s survey showed that consumers were becoming less optimistic about the future of the economy and their income and employment prospects. The market, however, was not unprepared for the unconventional rate cut because Das had broached this possibility at least twice in his public speeches. The six-member monetary policy committee (MPC), with newly inducted member B P Kanungo, who is deputy governor at the central bank, voted unanimously for the cut. Four of them voted for a 35-basis-point cut, while two external members, Chetan Ghate and Pami Dua, voted for a reduction of 25 basis points. The repo rate is now at a nine-year low of 5.4 per cent. Economists expect the rates to fall at least by another 40 basis points (bps) — in two phases. Bank of America Merrill Lynch expects a 15-bps cut in the October policy and a reduction of another 25 bps in February.
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In response to the past 75-bps repo rate cut (110 bps after the latest cut), banks have lowered their lending rate by just about 29 bps, the RBI noted. Das said credit growth would improve in the coming weeks and months, and transmission should be faster in the banking system. “The RBI will take whatever steps are required to ensure better transmission. It’s better to allow market forces to play, wherever regulatory interventions are required, the RBI will take necessary regulatory measures,” Das said.
Overall for the MPC, “private investment assumes the highest priority at this juncture”. Other banks were non-committal for now, but Indian Banks’ Association Chairman Sunil Mehta, who is managing director and chief executive officer of Punjab National Bank, said “further reductions in the lending rate are expected”. Banking stocks fell, while the 10-year bond yields rose 3 bps even after the rate cut. Bond dealers said the rate cut was factored in, but reports stating that the government would shelve the sovereign bond issuance dampened the mood in the market. The convention global central banks follow is to move rates by 25 bps and multiples of 25. However, that is not sacrosanct, and in recent times, the European Central Bank (ECB) has cut its rates by 10 bps each on four occasions below zero to a negative 0.40 per cent.
“The issue is not 35 basis points. Even Taiwan’s central bank cuts rates by 12.5 basis points. The issue here is that those are the benchmark for Taiwan or the ECB now. But for India, there is now no benchmark. Will it be 25, 35, 50, or 15 basis points? How do you build an effective consensus among MPC members, and how would the market price in the policy action is difficult to answer,” said a senior economist. But Das defended the cut, stating that the monetary policy committee (MPC) felt that 25 basis points was low and 50 basis points “too much”. “Reducing the policy repo rate by 35 basis points was, therefore, viewed as a balanced level of cut under the circumstances,” the governor said in his opening remarks.
Business Standard, 8th August 2019
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