RBI takes offbeat tack to help reverse growth slowdown

A securityman stands at the entrance of the Reserve Bank of India building in Mumbai on August 7, 2019.

A securityman stands at the entrance of the Reserve Bank of India building in Mumbai on August 7, 2019.   | Photo Credit: AP

EMIs to fall after ‘unconventional’ 35 bps rate reduction.

The Reserve Bank of India on Wednesday opted to break with convention by reducing the key policy rate, the repo rate, by 35 basis points (bps) to 5.4% as it focused monetary policy measures on helping revive demand to tackle a deepening economic slowdown.

While central banks typically cut or raise interest rates in increments of a quarter percentage point or multiples, Governor Shaktikanta Das said too much should not be read into the departure from convention.

A first for RBI

The extent of cut was determined by the situation, he said. This is the first time the RBI has moved rates by a figure that is not a multiple of 25 bps. A percentage point comprises 100 bps.

“Given the evolving economic situation, the assessment of MPC, based on demand conditions etc., 25 bps cut was inadequate, while a 50 bps rate cut was excessive, especially after taking into account the actions already undertaken,” Mr. Das said in a post-policy press briefing.

“That is why we have taken a balanced call.”

While all six members of the monetary policy committee (MPC) voted to cut rates, two members backed a 25 bps cut. With the GDP growth forecast for the year pared to 6.9%, the policy stance was kept accommodative.


RBI revised the growth forecast to 6.9% for FY20, from 7% predicted during the June policy while the first quarter of 2020-21, growth rate is expected to be 7.4%. Consumer price index based inflation is projected slightly higher at 3.5-3.7% for the second half of the current financial year and 3.6% for the first quarter of next fiscal.

With this rate cut, RBI has now reduced the repo rate by 110 bps in 2019.


“RBI has painted a reasonably gloomy picture for the economy and the 35 bps cut seems to suggest that it concedes the fact that the extent of the slowdown is sharper than it had projected earlier although it does not see the need to push the panic button (that a 50 bps might have been interpreted as),” said Abheek Barua, Chief Economist, HDFC Bank.

Though banks have been reluctant to to cut rates in response to the previous 75 bps repo rate cut, as their benchmark lending rate only declines by 29 bps, but after Wednesday’s rate cut, SBI was quick to response with a 15 bps cut in marginal cost of fund based lending rate. Other banks are expected to follow suit.

RBI takes offbeat tack to help reverse growth slowdown

Apart from rate cut, RBI has reduced the risk weight for consumer loans, except credit cards, from 125% to 100% - a step to address falling consumer demand in segments such as individual vehicle loans and personal loans. The NBFC sector which is facing cash crunch also saw measures which will increase banks’ headroom to lend to these lenders.

Commenting RBI steps as bazooka measures, SBI chairman Rajnish Kumar said, “The RBI has unveiled a host of bazooka measures to arrest the recent growth pangs even as it has marginally lowered its growth forecast for FY20.”

HSBC India Chief Economist Pranjul Bhandari who thinks growth for FY 20 will be much lower at 6.4%, said they expect two more rate of 25 bps over the fourth quarter of current fiscal and first quarter of the next fiscal.

“The RBI's explicit emphasis on prioritizing a growth recovery and expectations of one-year ahead inflation remaining well below 4%, gives us further confidence in our call,” she said.

Stock markets were disappointed as they expecting a 50 bps rate cut.

Equities lost ground with the benchmark Sensex shedding 286.35 points or 0.77% to close at 36,690.50. Earlier in the day, it touched a high of 37,104.79 but could not sustain the level amidst selling pressure.

Nearly 1,400 stocks lost ground, as against 1,114 gainers on BSE. The Sensex pack saw 22 stocks end in the red with heavyweights like State Bank of India, Tata Motors, Vedanta, Tata Steel and M&M all losing over 3% each. The broader Nifty closed at 10,855.50, down 92.75 points or 0.85%.

"While we were hoping 50 bps rate cut, the RBI has chosen unconventional cut of 35bps which is mildly positive for the market. However, RBI cutting its estimation of GDP growth rate below 7%, while widely expected, may not go down well with the market in short term," said Rajiv Singh, CEO, Karvy Stock Broking.

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Printable version | Apr 4, 2020 6:16:24 AM |

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