RBI keeps rates intact, clears way for cheaper loans

Mumbai: As widely expected, the Monetary Policy Committee of the Reserve Bank of India on Thursday unanimously voted to keep the policy repo rate unchanged while continuing with an accommodative stance. However, it announced multiple regulatory measures to make funds cheaper for banks and end borrowers, enable faster transmission of its past rate cuts to borrowers and incentivise the flow of credit to productive sectors of the economy.

Banks will get cash reserve ratio relief on incremental credit to retail loans for automobiles, residential housing and loans to MSMEs (micro, small and medium enterprises), which should improve monetary transmission to crucial industry segments which are currently struggling.

The central bank also announced a one-time permission to extend restructuring of MSME loans. For commercial real estate projects facing genuine difficulties, the date of commencement of commercial operations has been extended by one year, which implied that the banks can continue to show these loans as standard assets on their books and therefore do not need to make provisions for the same,
that will help alleviate funding woes of these crucial segments of the economy.

The RBI also said it would conduct Long-Term Repo Operations (LTRO), under which it would offer funds to banks at the repo rate (at 5.15 per cent), and announced a  revised liquidity management framework.

State Bank of India chairman Rajnish Kumar said: “The RBI policy is a statement of intent carefully using a repository of policy novelties to address the current delicate balance of growth and inflation. The decision to allow long term repo operations for one year and three
years for total amount of Rs 1 lakh crores at the policy repo rate will bring down cost of funds for banks and will facilitate better transmission within the current constraints of downward rigidity of deposit rates.”

“Exemption of CRR maintenance for all additional loans given for retail loans for automobiles, residential housing and loans to MSMEs is positive for banks, auto sector, residential housing and MSMEs will also help to lower the cost of funds. Extension of date of commencement of
commercial operations (DCCO) of project loans for commercial real estate by another one year without downgrading the asset classification will allow the real estate sector to focus on project completion. Extending the date of restructuring of MSME advances will also help the sector to navigate the current business downturn and is a logical corollary of budget announcement,” Mr Kumar added.

Thursday’s policy was the central bank’s first bi-monthly monetary policy of 2020. The policy rates have remained unchanged for the second time after consecutive cuts of 135 bps in 2019. However, lending rates tarried with just a 69 basis points decline. One basis point is one hundredth of a percentage point.

While addressing reporters during the monetary policy press conference, RBI governor Shaktikanta Das said the MPC will “persevere with the accommodative stance as long as necessary to revive growth”, and it “recognises that there is policy space available for future action”.

The RBI revised higher its headline CPI inflation projection by nearly two percentage points to 6.5 per cent year on year in Q1 2020 (versus 4.7 per cent earlier) and 5.4-5 per cent in Q2-Q3 2020 (versus 4 to 3.8 per
cent previously). However, it sees inflation trending lower through the year, with inflation set to fall below its four per cent target to 3.2 per cent in Q4 2020, with risks broadly balanced. The RBI cited the inflation outlook as “highly uncertain”. Even though vegetable prices are likely to decline, it flagged upside pressures from the broader food basket, particularly milk, pulses and other protein food items. It has also sounded cautious on supply-side shocks on core inflation from higher telecom charges, pharmaceutical prices and the impact of new emission norms, and said it remains vigilant on these pressures to become generalised. However, households’ one-year ahead inflation expectations eased by 70 basis points after a sharp rise in the previous survey.

On growth, the RBI believes GDP growth has troughed and will pick up sequentially from 4.5 per cent y-o-y in Q3 2019 to 4.9 per cent in Q4, 5.5 per cent in Q1 2020, 5.5-6 per cent in Q2-Q3 2020 (versus 5.9-6.3 per cent previously) and 6.2 per cent by Q4 2020. For FY21, the RBI expects GDP growth to pick up to 6 per cent y-o-y from 5 per cent in FY20, led by a recovery in private consumption (particularly in the rural economy), easing global trade tensions, improved policy transmission and measures announced in the budget. Despite pencilling in a recovery, the RBI sounded worried on growth, stating that “economic activity remains subdued and the few indicators that have moved up recently are yet to gain traction in a more broad-based manner”. Economists now expect the MPC to cut rates in Q2.