RBI surprises with a 25 bps rate cut

The first monetary policy committee (MPC) meeting under Shaktikanta Das as Reserve Bank (RBI) of India governor sprung a surprise rate cut on Thursday. The MPC slashed the benchmark lending rate or repo rate—the rate at which the central bank lends to commercial banks—by 25 basis points (bps) to 6.25 per cent. This is the first rate cut since August 2017.

The MPC also changed its policy stance from “calibrated tightening” to “neutral”. While the MPC members were unanimous in their call for a change in stance, the rate cut decision saw four members voting in favour, and two voting against. The new governor voted in favour of the rate cut. Das said the shift in stance allows the RBI room and flexibility to deal with challenges to growth.

On the growth front, the central bank in its statement said GDP growth for 2019-20 was projected at 7.4%. The statement went on to say that growth would be “in the range of 7.2-7.4% in H1, and 7.5% in Q3—with risks evenly balanced”. The central bank highlighted the following factors as among those that can pose risks to the growth outlook: lagged impact of the recent currency depreciation on net exports, and slowing global demand, especially “trade tensions and associated uncertainties”.

The central bank said retail inflation was seen at 2.4% in the January-March quarter and 3.2-3.4% in the April to September period this year; this is within the RBI’s medium term inflation target of 4% plus or minus two. The governor said that “continuing deflation in food and crude oil led to a decline in headline inflation”.

Among other important announcements made by the regulator on Thursday was the decision to assign risk weights to rated exposures of banks to all non-banking finance companies (NBFCs). This bodes well for the NBFC sector as this will allow banks to lend more freely to healthier NBFCs going forward. The RBI said more guidelines would be issued by the end of this month.

In addition to the sops for farmers and rural voters proposed in the recent interim Budget by finance minister Piyush Goyal, the RBI on Thursday increased the limit for collateral-free agricultural loans from Rs 1 lakh to Rs 1.6 lakh. The move is expected to benefit small and marginal farmer in particular.

When asked about the government reportedly making certain demands with respect to payment of surplus and dividend, Das said that the RBI was not doing anything that was beyond the legal provision and that all decisions of the RBI’s central board were based on established guiding principles.

Das refused to answer a query on farm distress, saying the topic must be discussed elsewhere in a “larger context”.

The cut in rates was welcomed by industry. ANAROCK Property Consultants chairman Anuj Puri said the rate cut was an “unexpectedly positive move, given the sops that the recent expansionary Budget gave to farmers at an additional cost of Rs 75,000 crore per annum. It was also overdue, as this has been the first cut in a long time.” He called the cut a positive for the real estate sector.

According to BankBazaar CEO Adhil Shetty, the rate cut was good news for homebuyers. “With the Budget scrapping tax from notional rent on second self-occupied property and enabling the capital gains to be invested in two houses instead of one, the interest in the real estate has already gone up. This additional rate cut will further sweeten the deal,” he said. And the rate cut would translate into savings. On a 20-year home loan for Rs 40 lakh at 8.85%, the cut will bring down the interest payable from Rs 45.4 lakh to Rs 43.9 lakh at 8.6%, he said. “That is savings of Rs 1.5 lakh over the tenor of the loan.”

Khushru Jijina, MD, Piramal Capital and Housing Finance said the lower cost of funds as a result of the rate cut would help speed up the recovery in the NBFC space post the liquidity crunch following the IL&FS debacle last year. “NBFCs would also benefit from RBI’s decision to link bank risk weights on NBFC exposures to the rating of such instruments. This would improve flow of bank credit to the better managed NBFCs, helping segregate the men from boys,” he said.

Gaurav Gupta, CEO, Adani Capital also commended the move to assign risk weights to banks’ NBFC exposures. “The shift in policy stance to 'neutral' from 'calibrated tightening' is a welcome development. However for us, the most important development is harmonisation of NBFC classification and risk weights to be assigned based on credit rating. It will help us service our customer base of entrepreneurs more comprehensively,” he said.

Here are reactions from other experts and industry representatives:

Rajnish Kumar, chairman, SBI

“The decision to rationalise the risk weights for on lending to rated NBFCs will enable better price discovery, lower capital requirement and facilitate credit flow from the banks. Opening up the ECB route for applicants under the IBC could facilitate a faster turnaround. The proposal to rationalise interest rate derivative regulations will provide the desired boost to the ultimate goal of developing a dynamic environment for management of interest rate risk. Decision to withdraw the provision of stipulations for FPI exposure to corporate bonds to a single corporate will incentivize the investors. Raising the limit for collateral-free agri loan to agriculture loans from Rs 1 lakh to Rs 1.6 lakh will result in enhanced coverage of small and marginal farmers. Further, the policy rightfully signals that rates may further soften further going forward, with headline inflation consistently undershooting RBI inflation mandate and inflation expectations materially down.”

Zarin Daruwala, CEO, India, Standard Chartered Bank

“The RBI has delivered a timely 25 basis points repo rate cut and also softened its monetary stance to neutral, on the back of consistently low inflation and slowing global economic growth. The RBI has been supplying liquidity through sustained Open Market Operations (OMOs) of government securities and with this rate cut, we should see a moderation in borrowing rates. Providing banks with increased flexibility on bulk deposits is a welcome move and will assist them in better managing their asset liability mismatches.”

Arun Singh, lead economist, Dun and Bradstreet

“While the cut in the repo rate by 25 bps is surprising, only a change in stance to neutral currently, would have been more prudent. The elevated and sticky core inflation, cost pass through of elevated industrial raw material prices and the expected election related spending indicated that demand side pressures to inflation persist. Nonetheless, given the change in stance from monetary tightening to neutral and expectations of benign inflationary trajectory and projected moderation in growth, the RBI might consider another rate cut during its April meeting. Besides, the dampening global demand and softening global commodity prices will ensure that imported inflation do not exert any upside pressure to headline inflation in the near term.”

V P Nandakumar, MD & CEO, Manappuram Finance

“The rate cut comes as a much needed shot in the arm for India’s NBFCs. While the cut in policy rate will benefit business and industry across the board, the proposal to reduce risk weights on bank exposure to better rated NBFCs will help reduce their cost of funds even further. We welcome this measure by the RBI as we believe it has brightened the outlook for India’s NBFC sector”.

Arun Thukral, MD & CEO, Axis Securities

“Easing ECB policies for external borrowings, increase in the limit for non-collateral loans to farmers to 1.6 lacs from 1 lac, could be more impactful politically in election season. Such proposals among others along-with a softer stance with higher impetus on growth are in contrast to the December policy which was more hawkish in nature. Also, the new RBI governor displays more accessibility vis-a-vis his predecessor which will be taken well by corporate. Concerns of meeting the fiscal maths, however, will weigh on markets.”

Shishir Baijal, chairman & MD, Knight Frank

“The reduction in repo and reverse repo rates by the RBI by 25 BPS is a welcome move, which we hope will provide a further fillip to the demand side for real estate. As a result of this reduction, we hope that banks will pass on the benefits of the revised rates to the end consumer of loans, thereby making it easier for them to make their purchase decision. For a sector which has been suffering from poor end user demand for some time now, this is a step in the right direction.”