A bit of action and a bit of hope

The credit policy presented on June 06, 2019, the second monetary policy of the financial year, was announced in the midst of a unique set of macroeconomic parameters. Know more

June 06, 2019 1:05 IST | India Infoline News Service
The credit policy presented on June 06, 2019, the second monetary policy of the financial year, was announced in the midst of a unique set of macroeconomic parameters. Fourth quarter growth had fallen to 5.8% and the full year growth in GDP for the fiscal year 2018-19 had come in at just 6.8%. In addition, the NSSO figures indicated that unemployment had touched a four decade high of 6.1%. At the same time, the global macro situation was also in a state of flux with the trade war showing no signs of relenting and the Middle East close to a geopolitical crisis. It is in this background that the second monetary policy for the fiscal was announced.

Highlights of the Monetary Policy Announcement

The Monetary Policy Committee (MPC) reduced the repo rate under the LAF by 25bps from 6% to 5.75%.
  • This results in a net impact of just 25bps cut because the MPC had hiked rates by 25bps each in June and August 2018 and later cut by the same amount in February and April 2019.
  • This rate cut reduces the reverse repo rate to 5.50% and the bank rate and the MSF rate to 6%; both with a spread of 25bps either side of the repo rate
  • More importantly, the MPC has decided to change the stance of the monetary policy from “Neutral” to “Accommodative” leaving room for more cuts in the future.
  • The MPC has hinted at comfortable liquidity conditions in the market through a mix of open market operations (OMO) and dollar swap auctions as and when required. 

Rate cut plus accommodation is the message

The broad message seems to be one of rate cuts plus an accommodative stance. This leaves the room open for more rate cuts in the coming months if warranted by the macro data. The MPC has clearly highlighted the weak growth as one of the key reasons for the 25bps rate cut. Apart from the fall in GDP, the Gross Capital Formation has also fallen nearly 3.6% and the growth pressures are visible across the emerging markets. Pressure is also visible on the core sector growth and the IIP has shown clear pressure on the agricultural and the manufacturing front. That raises the question why only 25bps rate cut?
The rate cut must be read in conjunction with the shift in the rate stance. The RBI wants to be clear on the rate transmission to the borrowers which had not happened in the first two rate cuts. Secondly, the monsoon forecasts have been weak to moderate and any shortfall in monsoon could have an impact on output and prices. The RBI wanted to be sure that the weak monsoons did not translate into higher inflation, especially when combined with the higher MSP.  The shift in stance, therefore, gives the MPC and the RBI more time and elbow room to take further action based on the future data flows. Interestingly, there was total unanimity in the MPC this time with all the 6 members of the MPC voting unanimously for cutting the rate by 25bps and for shifting the stance of the policy to Accommodative.

Going beyond the rates and liquidity issues

In the last few policy statements, the MPC has gone beyond just the rates and liquidity and also given a larger regulatory and supervisory trajectory. This policy has been no different. Here are some of the key highlights.
  • Liquidity ratio for banks shall be fixed at 4% for systemically important banks and 3.5% for other banks to bring about harmonization with global Basel standards over a period of time.
  • The proposal to offer payment bank licenses on tap has been put on hold till the actual performance of the 18 banks were reviewed for a longer period of time.
  • MPC has proposed to set up a working committee to review regulatory guidelines and the supervisory framework for Core Investment Companies (CIC).
  • With a view to offering a fair and transparent platform to retail players in the foreign exchange market, the MPC has announced that it will go live in August 2019 under the aegis of the clearing corporations.
  • RBI will do away with charges for NEFT and RTGS payments to encourage digital payments with the caveat that banks must pass on this benefit entirely to the customers.
  • With rising complaints on ATM charges and cross ATM restrictions, the RBI has appointed a committee to review the same which will submit its report by August this year.
  • In a nutshell, the RBI has given the dovish signal while keeping its doors open for further cuts. We will get better insights when the minutes are announced on June 20, 2019, where we can really conclude if there could be further rate hikes from August onwards.

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