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Rates to fall despite RBI’s status quo

Rate warriors: Shaktikanta Das, Governor, RBI, along with Deputy Governors in Mumbai on Thursday.

Rate warriors: Shaktikanta Das, Governor, RBI, along with Deputy Governors in Mumbai on Thursday.   | Photo Credit: PAUL NORONHA

Repo rate kept unchanged at 5.15%

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) decided at a meeting on Thursday to keep the interest rates unchanged in the wake of a rise in inflation, but emphasised that there would be space for rate reduction.

This is the second straight policy review meeting where the rates have been kept unchanged. The RBI reduced the rates by 135 bps between February and October 2019 before pressing the pause button in the December policy review. 

Thursday’s decision was unanimous among all six members of the MPC. 

RBI Governor Shaktikanta Das acknowledged that the market had factored in status quo. “While this decision may be on expected lines, and perhaps widely discounted, it’s important not to discount the RBI,” he said. “It has to be kept in mind that the central bank has several instruments that can be deployed to address the challenges that the economy faces in terms of the sluggishness in the growth momentum.” 

The central bank took two measures that could ease lending rates further. One, it opened a window to extend ₹1 lakh crore to the commercial banks at the repo rate, which is 5.15%. Second, banks have been exempted from maintaining the cash reserve ratio — which is 4% of the net demand and time liabilities now — for home, auto and MSME loans that are extended from January 31 to July 31.

“...It is an effort to ensure better monetary policy transmission,” Mr. Das said, explaining the objective behind the move.

The GDP growth for the next financial year is projected at 6%, in the range of 5.5-6% in the first half of the FY21 and and 6.2% in Q3. The growth projection for the current financial year was 5%.

Rates to fall despite RBI’s status quo
 

The outlook for the consumer price index-based inflation has been revised upward to 6.5% for the fourth quarter of the current financial year and 5.4-5.0% for the first half of 2020-21. It’s projected at 3.2% for third quarter of the next financial year.

While holding the rates, Mr Das reminded that there would be scope for further easing. “Barring the intensification of global risks, I would like to emphasise that there is policy space available for future action. This space needs to be used appropriately and should be suitably timed to optimise its impact on growth,” he said, adding that downside risks to global growth had increased in the wake of the outbreak of coronavirus.

Markets reacted positively to the tone, with the yield on the 10-year benchmark government paper dropping 6 bps to close the day at 6.45%.

Economists said that with RBI worried about growth recovery, the next rate cut could be as early as in April - the next policy review meeting.

A Nomura report said, “The RBI delivered a dovish pause with a clear signal that its bias remains towards easing… we continue to believe the next policy move is still a cut; we expect a 25bp repo rate cut in Q2 2020, which could get delivered as early as April”.

Abheek Barua, Chief Economist, HDFC Bank, said, “Going forward, our sense is that the central bank could take the first opportunity it gets to cut rates - as soon as the inflation optics start looking better and headline inflation comes in closer to the RBI’s target band. We now see a high probability of a rate cut (25bps) as early as Q1 FY21”. 

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Printable version | Jun 2, 2020 2:12:39 AM | https://www.thehindu.com/business/Economy/rbi-opts-for-long-term-repos-crr-exemption-to-lower-rates/article30755075.ece

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