Highlights of the April 2019 Monetary Policy
- The Monetary Policy Committee (MPC) opted to maintain the stance of the monetary policy as “Neutral”. Five members voted in favour of the status quo with only Dr. Dholakia voting for changing the stance to “Accommodative”.
- The repo rates were cut by 25 basis points from 6.25% to 6%. This restores the status quo prior to June 2018. Four of the six members voted for the repo rate cut with Dr. Chetan Ghate and Dr. Viral Acharya voting to hold rates.
- This rate cut proportionately reduces the reverse repo rate by 25 basis points to 5.75% and the bank rate as well as the MSF rate to 6.25% in terms of their fixed spread.
- The RBI has also held on to its objective of maintaining the sustainable inflation at 4% in the long run with a leeway of 2% either ways in stressed scenarios.
MPC again opts for growth over inflation concerns
The MPC decision has been triggered by weak signals of growth in the domestic economy and the global economy. The IMF has already downgraded the forecast of global growth from 3.7% to 3.5% for calendar year 2019. Most of the pain is expected because of the prolonged US-China trade war and the uncertainty over BREXIT. Even domestic GDP growth is expected to struggle to cross 7% in 2018-19 and the RBI projects GDP growth to improve marginally to 7.2% and 7.4% in the next 2 years. That clearly makes a case for a thrust to growth. However, even this number may be at risk since domestic investment activity and import of capital goods have weakened sharply since then. Considering the negative output gap, RBI is pushing for easier credit costs via repo rate cut.
Inflation appears set up for a measured trajectory
The inflation has been considerably lower, notwithstanding the sharp rise in February. The 2.6% inflation in February is still way below the RBI target of 4% inflation. The uptick in Feb inflation was largely driven by higher food prices. That is the only X factor at this point of time. While the IMD has forecast a normal monsoon, the private sector SKYMET has projected below average rains due to the El Nino effect. In fact, the probability of the El Nino effect has increased substantially post February and there is now an 80% probability of the El Nino hitting rains before the end of May. Even considering below average rainfall this year, the inflation rate still has a buffer of 1.4% from the RBI cut off. Additionally, Brent crude is facing pressure at higher levels of $70/bbl as shale supply; rising inventories and the risk of global slowdown are impacting oil prices. Hence the RBI has estimated that higher inflation may not really be a risk, triggering the 25 bps rate cut.
Key policy announcements in the policy
While a lot of emphasis is placed on rate action, other policy issues are equally relevant.
- RBI has pledged to keep the liquidity taps functioning through monthly repos worth Rs.40,000 crore plus dollar swap auctions whenever required.
- To reduce the pressure on banks and enable them to create more credit, the total HQLA (High Quality Liquid Assets) carved out of NDTL has been increased by 200 bps.
- The policy has announced its intent to boost the housing securitization market, which may be a precursor for an active secondary market and also a REITS market.
- The RBI will also appoint a task force to develop the secondary market for corporate loans to enable easy and transparent pricing and a ready exit for lenders.
- External benchmark for floating rate loans to retail customers and SMEs, announced in the December policy, has been put off till further discussions. Banks were insisting on benchmarking to cost of funds and include benchmarking of deposit rates. RBI has sought more time to debate the issue in granular detail.
- The Counter Cyclical Capital Buffer (CCCB) was first mooted in 2015 with a view to take precautionary measures if the credit / GDP ratio crossed a certain threshold. RBI assessment is that CCCB may not be warranted at this point of time.
- The RBI has also initiated G-Sec trading in ICSD, licensing of NBFCs as Category II ADs, convergence of priority sector guidelines and extension of the NBFC Ombudsman scheme to all NBFCs. Of course most of these are work in progress.