NOT THE BORING 25 bps BUT INTERESTING 35 bps CUT!

Neither yours nor mine; neither 25 nor 50; RBI trimmed rates by 35 bps while maintaining its accommodative stance – this means there could more rate cuts or status quo but no rate hike. Well, 35 bps is closer to the 50 than to 25, that’s the silver lining here and we have given up going by the multiples of 25.

Explaining why 35bps, the RBI Governor, Shaktikanta Das said that given the macroeconomic indicators, the collective 75 bps cuts since Feb’19 and liquidity measures taken, growth more than inflation has taken center stage and the RBI felt 25 bps cut would not have been enough and 50 would have been excessive. Thus the middle path.

The market seems to be happy; at least as of now.

The RBI has taken cognisance to the fact that growth is slowing down – it said, “Addressing growth concerns by boosting aggregate demand, especially private investment, assumes the highest priority at this juncture while remaining consistent with the inflation mandate.”

Having said all this, the fact remains that given the global upheavels happening right now, there is only this much the RBI could have done.

Highlights of the policy:

• Reduced the policy repo rate under the liquidity adjustment facility (LAF) by 35 basis points (bps) from 5.75 per cent to 5.40 per cent with immediate effect.
• Reverse repo rate under the LAF stands revised to 5.15 per cent
• Marginal standing facility (MSF) rate and the Bank Rate now stands to 5.65 per cent.
• MPC also decided to maintain the accommodative stance of monetary policy.
• Four members voted to reduce rates by 35bps and two by 25 bps – so decision was unanimous for a rate cut.
• CPI inflation is projected at 3.1% for Q2FY20 and 3.5-3.7% for H2FY20, with risks evenly balanced. CPI inflation for Q1FY21 is projected at 3.6%.
• Real GDP growth for FY20 is revised downwards from 7% in the June policy to 6.9%  – in the range of 5.8-6.6% for H1FY20 and 7.3- 5 7.5% for H2FY20-  – with risks somewhat tilted to the downside; GDP growth for Q1FY21 is projected at 7.4%.
• RBI cuts risk weight for consumer credit from 125 percent to 100 percent, except for credit card receivables.
• Exposure limit for single NBFC raised to 20% to 15% of Tier-I capital
• Bank lending to NBFCs for agriculture and SME loans eligible for priority sector classification

Regarding liquidity in the system, RBI said that the liquidity in the system was in large surplus in June-July 2019 due to (i) return of currency to the banking system; (ii) drawdown of excess cash reserve ratio (CRR) balances by banks; (iii) open market operation (OMO) purchase auctions; and (iv) the RBI’s forex market operations. RBI absorbed liquidity of Rs.51,710 crore in June, Rs. 1,30,931 crore in July and Rs.2,04,921 crore in August (up to August 6, 2019) on a daily net average basis under the LAF. Two OMO purchase auctions amounting to Rs.27,500 crore were conducted in June, thereby injecting durable liquidity into the system.

Pertaining to transmission of monetary policy rate cuts by banks, as against RBI’s 75 bps cut, the banks have transmitted only 29 bps. Hopefully, banks will transmit more this time around because as pointed out by RBI, there is enough liquidity in the system for more transmission.

The RBI has done what best it could but the truth is that growth slowdown is more structural and not cyclical. And now the onus is on the Govt to take steps to promote growth though it has very little leeway on the expenditure front.

The next trigger for the market? The only thing which could work now is the removal of surcharge inadvertently imposed on the FIIs/FPIs. Two days, the attention was diverted from the economy to Kashmir; it’s time to once again look at addressing growth issues – that too is a very pertinent nationalistic thing to do.