No surprises

Spread the love

No surprises

The RBI has played conservative in announcing a rate cut of just 25 basis points

Source: https://www.thehindu.com/opinion/editorial/no-surprises/article27583406.ece

Why in news?

  • RBI has cut rates, but its impact on economic activity depends on banks transmitting it to borrowers.

Background

  • The Reserve Bank of India’s rate-setting panel reduced the repo rate by 25 basis points (bps) to 5.75 per cent in the second bi-monthly monetary policy meet of the financial year 2019-20 (FY20).
  • A cut in rates was on expected lines. It was a third straight interest rate cut by the RBI’s monetary policy committee (MPC). The stance of the policy was changed to accommodative from neutral.
  • Repo rate: The repo rate is the rate at which the RBI lends money to the commercial banks to tide over any shortfall of funds. After the cut, the reverse repo rate stands at 5.50 per cent.

Why has RBI cut repo rate

  • Widely expected: The RBI was widely expected to go for an interest rate cut amid dismal gross domestic product (GDP) growth, subdued investment and slowdown in consumption space.
    • Last week, government data showed GDP growth slowed to a five-year low of 5.8 per cent in the fourth quarter (Q4) of FY19.
    • Weak growth amid benign CPI inflation had created room for the Monetary Policy Committee to cut the repo rate by 50-75 bps through FY20E, beginning in June 2019.
  • Rate cut: A 25 basis point (0.25 percentage point) cut was widely expected, and the RBI delivered that.
    • Whether a deeper 50 basis point cut was necessary, given the sharp slowdown in the economy, is now a purely scholastic question.
  • Inflation: Emboldened by benign inflation and availability of buffer foodgrain stock, the central bank’s monetary policy committee (MPC) voted unanimously to bring down the repo rate from 6% to 5.75% — the lowest since September 2010.
    • Repo rate is the price commercial banks pay to the RBI for short-term funds.
    • With inflation well under the benchmark figure of 4%, the stage was probably set for the RBI to spring a surprise but it chose to play conservative.
  • Focus on growth: Maybe the idea is to keep the powder dry for a further rate cut, if needed, in the next policy. If the economy fails to recover well enough from its slumber by August, the onus will, after all, shift back to the RBI.
    • That said, there is enough in the latest policy to indicate that the RBI’s focus is now on growth.
  • ‘Accommodative’ stance: The change of stance to ‘accommodative’ from ‘neutral’, the statements by RBI Governor Shaktikanta Das at the press conference that ensuring systemic liquidity will remain a priority for the central bank, and the setting up of an internal working group to review the existing liquidity management framework, all clearly point to a central bank that is not only listening to the demands of the key stakeholders in the economy, but also acting on them.

Concern over RBI’s repo rate cut

  • Transmission of rates: The one area where the RBI has some work to do is in the transmission of rates.
    • The big concern is whether the transmission of the cut takes place adequately, in the sense of banks passing in the rate cut to customers. This has not happened sufficiently in the case of the previous cuts.
    • By its own admission, only 21 of the cumulative 50 basis points rate cut effected by the RBI in the February and April policies has been passed on to borrowers by banks.
  • Excuse from banks: The excuse from banks, at least in the last few months, was that liquidity was tight and so deposit rates could not be cut.
    • However, liquidity has considerably improved in the last week, and more so with the new government loosening the purse strings.
    • There cannot be any more excuses from banks to not pass on the cuts fully.
  • RTGS/ NEFT: The RBI’s decision to do away with its charges on RTGS/ NEFT (Real Time Gross Settlement System/ National Electronic Funds Transfer) transactions is welcome provided it can, again, ensure that banks pass on the benefit to customers.
  • Reduction in the leverage ratio: The central bank has also proposed measures such as a reduction in the leverage ratio under Basel norms for banks, which will increase their lendable resources.
    • Leverage ratio in simple terms is the relation between the amount of equity that a company has and the amount of debt that it is carrying in its books.
      • It is a measurement of the capacity of the company to meet its financial obligations.

Way ahead

  • The projected growth rate for this fiscal has been lowered to 7% from the 7.2% projected in April, and the first-half growth is estimated at 6.4-6.7%, which by itself appears ambitious given the current trends in the economy. With the RBI having done its bit, the focus shifts to the Finance Ministry.
  • There are tremendous expectations from the government over the next round of reforms, backed as it is by a strong mandate.
  • The onus is now on the budget, to be presented on July 5, to unleash the animal spirits again in the economy.

36total visits,1visits today

About the author

roottn

Add Comment

Click here to post a comment