Primary aim of the MPC is to boost growth through fiscal and monetary stimulus and RBI has acted decisively and on time. RBI has retained the ‘Accommodative stance’.
In an unconventional measure of using the rate parameters in multiples of 25, the cut in the repo rate is by 35 bps and reverse repo to 5.15 %. Rate cut has been the flavor of season with most central banks heading south on policy rates, notably FED in US. Transmission by banks had been ‘patchy’ in the past. Now with comfortable liquidity position of Rs 2.13 trillion as on 5th Aug in the system, it is expected banks will start the transmission process quickly.
The GDP growth for 2019-20 is also revised from 7.0% to 6.9% on the reflection of slowdown in consumption demand, government spending and lack of quality jobs – all which has contributed to the slowdown. Slowdown can also be attributed to long list of domestic and international challenges. IMC opines that rate mechanism is just one part of the credit management solution in the economy. RBI could also look at “credit less” growth as was analyzed by IMF in 223 recovery episodes, shouldered by ‘consumption sector’. by strengthening employment and wage growth in rural and urban labour markets.
IMF also had lowered the country’s GDP growth from 7.3% to 7% citing weaker than expected demand. RBI expects to boost aggregate demand, especially private investment.
CPI Inflation projected at 3.1% for Q2 FY 20 and between 3.5 to 3.7% in HY FY 20 which is well within the target of 4%.
Interest rate on home loans and auto loans are expected to be reduced by the banks. The move will also help credit growth in the banking system.
While liquidity problem for NBFCs will not go away early, to boost funding to NBFCs, banks exposure limit to a single NBFC has been raised from 15% to 20% of the banks Tier 1 capital. Lending to agri sector ( upto 10 lacs), to MSMes (upto 20lacs ) and to Housing Loan (upto 20 lacs) is classified as a Priority sector loans.
Economic deceleration, which is cyclical and not structural in nature, has intensified over last few months and data broadly paints a picture of subdued demand – especially in private consumption – in which firms and households continue to hold back spending. Central govt spending is just 2% up in Q1 FY20 and aggregated key spending by 19 states in just up by 0.2% which may impact governments ability to pump prime.
RBI hopes that the delayed monsoon will pick up in the remaining period and may cover the deficit gap, though the area under acreage will be marginally lower than last year.
The proposal to set up a Central Payment Fraud Registry to track frauds in the payment system is welcome step and will strengthen the banking system.
IMC opines that ‘optimism’ is the key to economic pickup and the rate cut with right communication and cues on liquidity would help in boosting confidence in the economy.