RBI’s ‘Unconventional’ Rate Cut To Support Growth, Say Experts
The Reserve Bank of India regional office stands in New Delhi, India. (Photographer: T. Narayan/Bloomberg)

RBI’s ‘Unconventional’ Rate Cut To Support Growth, Say Experts

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Terming the Reserve Bank of India’s decision to reduce interest rate by 35 basis points as unconventional, banking and financial experts on Wednesday said the intent is to support growth while keeping inflation at sub-4 percent level.

They also pointed out that further initiatives are needed to boost consumption and investment to stimulate economic growth.

State Bank of India Chairman Rajnish Kumar said the RBI’s “unconventional” rate cut is perhaps a recognition that the monetary policy works best with unanticipated surprises to the market.

“The RBI has unveiled a host of bazooka measures to arrest the recent growth pangs even as it has marginally lowered its growth forecast for fiscal year 2020. On the development and regulatory front, the decision to make available the NEFT ( National Electronic Funds Transfer) platform on 24/7 basis, coupled with on-tap authorisation will add depth to retail payments (currently around 85 lakh transactions on a daily basis),” Kumar said.

Yes Bank Chief Economist Shubhada Rao said that growth concerns “beget unconventional monetary easing”.

“In a departure from usual convention of changing benchmark rates by 25 basis points (or multiples thereof), the repo rate was reduced by 35 basis points to 5.40 percent (the lowest since July 10).”

While the RBI expects risk on inflation forecasts to be evenly balanced, it anticipates some downside risks to its FY20 growth estimate, she said.

“The departure from taking conventional steps towards changes in the benchmark policy rate potentially opens the door for a future encore,” Rao said further.

Kotak Mahindra Bank, President - Consumer Banking, Shanti Ekambaram said the monetary policy committee has ensured an all-round accommodative framework to support growth.

“This is against the backdrop of global interest rates easing, slowing global growth amidst rising trade wars, benign domestic inflation, a fall in imports and exports, and slowing urban and rural consumption demand in India ... the central bank has provided adequate measures through the monetary policy,” Ekambaram said.

What is required now are further initiatives to boost consumption and investment to stimulate economic growth, she added.

ICRA said the unconventional 35 basis points rate cut is a clear signal that the increasing evidence of a pervasive slowdown in economic growth has emerged as the Monetary Policy Committee's chief concern, given that it expects inflation to remain under its medium-term target.

“The focus will now shift to improving transmission to bank lending rates, with the systemic liquidity surplus in excess of 1 percent of net demand and time liabilities,” said Aditi Nayar, Principal economist, ICRA.

George Alexander Muthoot, managing director-Muthoot Finance said the RBI’s mandate to open up lending to NBFC sector will boost the consumer spending like auto sales, real estate and others.

“We expect the rate cuts to encourage the banks for a faster transmission thereby providing much needed relief to the cost of funds. The policy clearly focuses on managing inflation and reviving the economy. The overall investment demand and the credit environment of the economy will pick up,” Muthoot said.

Reliance Home Finance Executive Director and Chief Executive Officer Ravindra Sudhalkar said the RBI’s decision to cut rates by 35 basis point is a positive decision.

The move to allow banks to lend to priority sectors, including to housing sector of up to Rs 20 lakh loans, through NBFC arms will kickstart credit flow especially to affordable housing sector, he said.

Also read: Hands-On Monetary Policy From A Hands-On RBI Governor

Measures to improve credit flow to NBFCs, unsecured borrowers and priority sectors with lowering of risk weight will complement the overall stance of adequate liquidity and lower rates, said RK Gurumurthy, Head - Treasury, Lakshmi Vilas Bank.

Rate transmission is expected to improve significantly in the coming days. Deposit rates should continue to drift lower, he said.

Kotak Institutional Equities said the RBI continued with the rate cut cycle but in a surprise change to the quantum,however, transmission to lending rates will likely remain weak unless there is a clear visibility of adequate liquidity sustaining over the medium term.

"The MPC remains sanguine on inflation with projections up to Q1 FY2021 remaining well under 4 percent....Steps to enhance the credit flows to NBFCs and classification of certain sectors to the priority sector lending through NBFC on-lending are also welcome,” said B Prasanna, Head Global Markets group, ICICI Bank.

Reduction in risk weightage for consumer credit will free up capital from the banking sector for productive use. Similarly, permitting Banks to on-lend through NBFCs will facilitate credit flow to priority sectors, the SBI chairman noted.

Also read: Calling RBI: Show Us Some Thought Leadership

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