With the general election around the corner, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has decided to cut the benchmark lending rate by 25 basis points (bps) and bring it down to 6%. A rate cut of the same quantum was recommended when it met last in February, too.

At the first monetary policy meeting of fiscal year 2019-2020, the MPC decided to maintain its ‘neutral’ stance unlike last time when it decided to change it from ‘calibrated tightening’ to ‘neutral’.

Four of the six members of the MPC voted for a cut; five voted in favour of leaving the policy stance unchanged. Chetan Ghate and deputy governor Viral Acharya voted to keep the repo rate unchanged at 6.25%, while Ravindra Dholakia voted to change the stance from ‘neutral’ to ‘accommodative’.

The RBI has revised its GDP growth forecast for fiscal year 2019-20 to 7.2% from 7.4%. For the first half of FY20, the RBI said it now sees GDP growth between 6.8-7.1%, down from the previous projection of 7.2-7.4%. For the second half of the fiscal year, the RBI said growth would be in the range of 7.3-7.4%. In February, the central bank had said it sees growth to be 7.5% in the third quarter of the year.

The RBI went on to say that its projection for retail inflation has also been revised downward for the first and second half of this fiscal year. In February, the RBI’s projection for CPI inflation in H1 FY20 was 3.2-3.4%; it has now been brought down to 2.9-3.0%. For H2 FY20, the RBI now sees CPI inflation in the range of 3.5-3.8%, with risks broadly balanced. Earlier, the RBI has projected retail inflation for Q3 of this year at 3.9%.

In its policy statement, the RBI pointed out five factors that motivated a downward revision in inflation projections: low food inflation in January-February, fall in fuel group inflation, low CPI inflation excluding food and fuel in February, rise in global crude oil prices and moderation in household inflation expectations. Along with these factors, the RBI said it has assumed that the coming monsoon will be normal.

Other important announcements include allowing banks to reckon an additional 2% of statutory liquidity ratio (SLR) towards computing liquidity coverage ratio (LCR), thereby releasing more money for lending purposes. The RBI also said it will be forming a committee for the development of the housing finance securitisation market and a task force for the development of a secondary market for corporate loans.

The RBI has also proposed to set up a framework for quicker resolutions of failed payment transactions and a compensation framework as well which will be in place by end of June 2019.

When asked about the Supreme Court striking down the much-talked about February 12 circular of the RBI on non-performing assets resolution, RBI governor Shaktikanta Das said a new circular is in the works. “In the light of the Supreme Court order, the RBI will take necessary steps, including issuance of revised circular as may be necessary for expeditious and effective resolution of stressed assets," he said.

However, Das refused to answer questions on the debate over the credibility of India’s GDP and jobs data, saying the debate was a political one and he will not comment on it.

Here are some reactions to the monetary policy decision from industry representatives and analysts.

Rajnish Kumar, chairman, SBI

“The downward revision in GDP and inflation projections reveals near term global headwinds and lower than anticipated rainfall might add to uncertainties. On the regulatory front, the decision to categorize additional 2% of excess SLR for LCR calculation is a welcome step for the banks for releasing additional liquidity. The decision to explore the development of the secondary corporate loan market and Housing Finance Securitisation is well timed and will enable a better price discovery for market players in sync with their risk appetite. The proposal to put in place a TAT framework for resolution of customer complaints as well as compensation framework will cheer up the customer community. Overall, it is a forward-looking policy catering to the demands of the various market participants.”

Arun Thukral, MD & CEO, Axis Securities

“On account of the policy announced today, we do not expect any short-term volatility in Indian markets as it was on expected lines. With consumption and investment still to pick up in a big way, a soft interest rate regime will help boost both. Guidelines for transmission of repo rate cuts by banks being passed to customers, especially home buyers, will be eyed favorably by the markets.”

Gagan  Banga, Vice Chairman and Managing Director, Indiabulls Housing Finance Limited

“RBI’s announcement of lowering the repo rate by 25 bps is in line with market expectations. The rate cut will cheer the housing sector, both on the supply and the demand side. The pick-up in the sector will accelerate especially as it comes on the back of GST rationalisation. Further, the committee’s proposal to develop housing finance securitisation markets, will lead to better management of asset-liability and liquidity in the sector.”

Anil Gupta, sector head, financial sector ratings , ICRA

“The second rate cut in the current calendar year is likely to prod banks to cut the lending rates to borrowers. However, we believe that despite an additional cut in policy rates, the transmission in banks’ lending rate will remain incomplete as the incremental build-up in their deposits continues to lag the credit growth and the interest rates on small savings continue at elevated levels. Improvement in the systemic liquidity conditions will remain the key driver for improving bank’s ability to effect cut in their lending rates. No substantial relief is expected for borrowers in their monthly loan installments as banks are unlikely to induce a large cut in their benchmark lending rates”

Sapan Gupta, partner, Shardul Amarchand Mangaldas & Co

“The statement on issue of releasing of fresh circular on stressed asset is welcomed. The revised circular should take inputs from banks and other practitioners. Also, the decision of sending defaulting companies to NCLT should be left to the discretion of banks but can be monitored closely by RBI.”

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