RBI’s IInd Bi-Monthly Monetary Policy Review as on 6th June 2019

- RBI cuts repo rate for 3rd time in a row by 25 bps to 5.75%. The repo rate, which now stands at 5.75 per cent, is the lowest since July 2010.
- RBI delivers another rate cut, shifts policy stance to 'accommodative'.

The Reserve Bank of India (RBI) on Thursday the 6th June 2019, cut key policy rates by 25 basis points, the third consecutive time it has done so. The repo rate - the key interest rate at which the RBI lends to the banks - will now be 5.75%. The central bank has also changed its stance to ‘accommodative’ from ‘neutral’. The rate cut decision came after the central bank’s Monetary Policy Committee (MPC) concluded its second bi-monthly monetary policy review for 2019-20. The decision of the rate cut was unanimous.

“On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today decided to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 5.75 per cent from 6 per cent with immediate effect,” the RBI said after the second bi-monthly meeting of the MPC for 2019-20.

Following are the Highlights of IInd Monetary Policy announced on 6th June 2019:

* Repo rate reduced by 25 bps to 5.75 per cent for third time in a row

* Reverse repo rate now stands at 5.50 per cent, marginal standing facility (MSF) rate 6 per cent

* RBI changes policy stance to accommodative from neutral

* Cuts GDP growth forecast to 7 per cent from 7.2 per cent for FY20

* Raises retail inflation forecast for April-September to 3-3.1 per cent and 3.4-3.7 per cent in October-March

* Projects upward bias in food inflation in near term due to rising prices of food items

* Forecast risks to inflation trajectory from monsoon uncertainties, unseasonal spike in vegetable prices, crude oil prices, financial market volatility and fiscal scenario

* Waives RTGS and NEFT charges to promote digital transactions

* Sets up a panel to review ATM charges, fees levied by banks

* To issue draft guidelines for ‘on tap’ licensing of small finance banks by August

* Flags sharp slowdown in investments, moderation in private consumption growth as concern

* All six MPC members voted in favour of 0.25 per cent policy rate cut

* Average daily surplus liquidity in the system at  66,000 crore in early June

* Foreign Exchange Reserves stood at USD 421.9 billion on May 31, 2019

* Next monetary policy statement on August 7.

“The MPC notes that growth impulses have weakened significantly as reflected in further widening of the output gap compared since April 2019 policy. A sharp slowdown in investment activity along with a continuing moderation in private consumption growth is a matter of concern,” RBI said in a statement.

Here are 10 key takeaways from the monetary policy announcement:

FY20 GDP growth forecast downgraded: RBI has downgraded growth forecast for FY20 to 7 per cent from 7.2 per cent projected in April policy. It said March quarter data indicated that domestic investment activity has weakened and slowing exports have weighed down overall demand. Weak global demand due to escalation in trade wars may further impact India’s exports and investment activity. Further, private consumption, especially in rural areas, has weakened in recent months.
On the positive side, political stability, higher capacity utilisation, an uptick in business expectations in Q2, buoyant stock market conditions and higher financial flows to the commercial sector augur well for investment activity, RBI said.

Inflation projection: RBI revised CPI inflation projection for April-September period upward to 3-3.1 per cent from 2.9-3 per cent and for October 2019 –March 2020 period to 3.4-3.7 per cent from 3.5-3.8 per cent. “Risks around the baseline inflation trajectory emanate from uncertainties relating to the monsoon, unseasonal spike in vegetable prices, international fuel prices and their pass-through to domestic prices, geopolitical tensions, financial market volatility and the fiscal scenario,” RBI said in a statement.

Change in policy stance: The MPC changed policy stance from ‘neutral’ to ‘accommodative’. All members of the MPC, including Chetan Ghate, Pami Dua, Ravindra H Dholakia, Michael Debabrata Patra, Viral V Acharya and Shaktikanta Das unanimously decided to reduce the policy repo rate and change the stance of monetary policy. “Unanimous decision reflects MPC’s stance to act decisively and act in time,” RBI Governor Das said. The change in stance effectively means a rate hike is not off the table and there could be possibility of further rate cut.

Update on liquidity: RBI said liquidity in the system turned into an average daily surplus of Rs 66,000 crore in June after remaining in deficit during April and most of May due to restrained government spending. The central bank injected Rs 70,000 crore in April and Rs 33,400 crore in May on a daily net average basis under the LAF. It conducted two OMO purchase auctions in May amounting to Rs 25,000 crore and a dollar buy-sell swap auction of $5 billion (Rs 34,874 crore) in April for a tenure of three years to create durable liquidity in the system. The apex bank has also announced an OMO auction of Rs 15,000 crore on June 13, 2019.

What’s in it for borrowers & investors? Borrowers can expect more rate cuts in the future, as monetary policy stance has changed from ‘neutral’ to ‘accommodative’. The repo rate, at which the central bank lends to the system, will come down to 5.75 per cent after the cut from 6 per cent. Likewise, the reverse repo rate has been reduced to 5.50 per cent from 5.75 per cent. With the rate cut, equated monthly instalments, or EMIs, on home loans may come down if banks decide to pass on the benefit to borrowers.
Analysts said real estate, NBFC, banking and auto stocks would be key beneficiaries of this rate cut.

Leverage ratio for banks: RBI said it has decided to lower minimum leverage ratio for Domestic Systemically Important Banks (DSIBs) to 4 per cent from 4.5 per cent under the Basel-III norms and 3.5 per cent for other banks. Instructions in this regard shall be issued before end of June 2019.

Licensing of small finance banks: RBI in another release said more time is needed to review the performance of payments banks before considering the licensing of this category of banks to be put ‘on tap’.

ATM interchange fee structure: There have been persistent demands to change ATM charges and fees. In order to address these, RBI has set up a committee involving all stakeholders, under the chairmanship of the Chief Executive Officer, Indian Banks’ Association (IBA), to examine the entire gamut of ATM charges and fees. The committee is expected to submit its recommendations within two months of its first meeting. The Composition and Terms of Reference of the Committee will be issued within a week.”

Updates on Jalan Committee: The RBI Governor said Jalan Committee is working independently on the issue of the central bank’s cash reserve. It is working on its own in an objective manner. It needed some extra time and has been granted it. “We expect the report may come very shortly,” he said.

Updates on NBFC: Governor Das said RBI was closely monitoring the NBFC sector, to ensure financial stability. Even though the central bank does not regulate these shadow banks, Governor Dash said since it is its mandate to ensure overall financial stability, the central bank has been monitoring the situation closely and won’t hesitate to intervene if the situation warrants.

To read full statement of MPC Please click on the following link:Governor’s Statement – Second Bi-Monthly Monetary Policy, 2019-20Second Bi-monthly Monetary Policy Statement, 2019-20 Resolution of the Monetary Policy Committee (MPC) Reserve Bank of India

Source: Rbi.org.in, Business Line, Economic Times & LivMint.

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