POLICY OUT OF THE WAY, ELECTION BECOMES OMNIPOTENT

The RBI did very much what was on expected lines – it cut the rates by 25 bps and the stance is neutral. The RBI also reduced its GDP forecast and ditto for inflation. This is the second rate cut from the RBI Governor, Shaktikanta Das, who took charge in Dec. The earlier 25 bps rate cut was in Feb.

And because it was very much as expected, the Indian equity benchmarks traded lower.

The RBI has taken the much needed liquidity measure, going with the banks which have been making a case for a leeway in the Liquidity Coverage ratio (LCR). This has let RBI allow banks to use an additional 2% of government securities within the mandatory SLR requirement for the purpose of LCR. This, bankers say is a great move as it will inject 2.6 lakh crore into the system, which will improve the lending capacity of the banks at lower rates. Making credit available at cheaper rate is a very good move, much needed to spur demand.

What we also noticed for the first time is that the RBI is moving from being a mere inflation watcher to growth supporter too. And that’s a huge change for RBI. But while on inflation, the RBI has stated that the short term outlook for food inflation remain benign. The reports of lower rainfall from Skymet and resurgence of El Nino in 2019 are cause for concern. Summer could see an abrupt rise in prices, which is a seasonal factor.

The question is whether the banks will transmit this rate cut and only if that happens will EMIs comes down and demand will get a boost. In fact RBI has said that it will bring out guidelines to ensure effective transmission of rates.

And the all-important question of the Feb 12th circular getting squashed by the Supreme Court, in the ensuing Press Conference, Shaktikanta Das said that the powers of RBI are not in doubt at all and assured that a revised circular on stressed assets could soon be issued.

Highlights of the policy:

• RBI cut repo rate by 25 basis points to 6%. 
• Reverse repo now at 5.75% and CRR at 4%
• Marginal standing facility (MSF) rate and the Bank Rate stands at 6.25%
• MPC maintains neutral stance on monetary policy
• MPC notes there is a need spur private investments
• FY 20 GDP seen at 7.2% with risks evenly balanced. GDP for H1FY20 seen at 6.8-7.1% and 7.3-7.4% in H2FY20, with risks evenly balanced.
• Forecast of CPI - 2.9%-3%  for H1FY20 and 3.5-3.8% for H2FY20
• Fiscal situation at govt level needs careful monitoring
• Moderation of growth in the global economy might impact India’s exports.
• Output gap remains negative
• Domestic economy is facing headwinds, especially on the global front.
• To form a panel on housing finance securitization markets
• RBI see’s unprecedented rise in currency in circulation in Nov.
• Pami Dua, Ravindra Dholakia, Michael Debabrata Patra and RBI governor Shaktikanta Das voted in favour of the decision to reduce the policy repo rate by 25 basis points. Chetan Ghate and Viral Acharya voted to keep the policy rate unchanged.

The Policy is out of the way and now the main driver will be the elections and when it comes to stock specific action, it will be based on earnings.