Monetary Policy: RBI Governor Shaktikanta Das On Economy, Liquidity, Transmission And Credit Flow
Reserve Bank of India Governor Shaktikanta Das. (Source: PTI)

Monetary Policy: RBI Governor Shaktikanta Das On Economy, Liquidity, Transmission And Credit Flow

The Monetary Policy Committee announced a 35-basis-point cut in the repo rate on the back of growth concerns. In a briefing after the announcement, Reserve Bank of India Governor Shaktikanta Das explained why the MPC picked a number such as 35 and not 25 or 50 basis points as is common.

Here’s what Das said about the rationale behind today’s policy action and what experts made of it:

“The MPC has voted for a policy rate reduction of 35 bps instead of conventional 25 bps. Let me explain the rationale underlying this action. Considering the evolving macroeconomic outlook, the RBI has been pre-emptive in its monetary policy actions and stance. Since Feb 2019 it has reduced the policy rate by a cumulative 75 bps till today's meeting. In addition it has changed the stance of policy from “neutral” to “accommodative” which is effectively a further reduction in the policy rate since it takes a rate increase off the table while committing to either rate reductions or status quo going forward. Furthermore, sufficient liquidity has been provided to the system resulting in overnight money market rates trading below the policy rate throughout July and August so far. In today’s meeting, the MPC judged that with inflation projected to remain within target addressing growth concerns by boosting aggregate demand especially private investment assumes the highest priority at this juncture. Against the backdrop of policy actions taken so far the MPC felt that it is prudent to remain accommodative while remaining consistent with inflation mandate. The MPC considered it necessary to calibrate the size of the policy repo rate cut to the dynamics of the situation. Accordingly, the MPC was of the view that the standard 25 bps might prove to be inadequate in view of the evolving domestic and global macro economic developments. On the other hand, reducing policy repo rate by 50 bps might be excessive especially after taking into account the actions already undertaken by the RBI. Reducing the policy repo rate by 35 bps was therefore viewed as a balanced level of cut under the circumstances.”

I think Governor Das has walked the talk. He had raised the issue, why stick to 25 or 50 basis points? This time, he has executed that thought. 35 is a ten bps positive surprise. Going forward it could be a 10 or 15 bps rate cut as well. So we wait for the commentary about how they perceive growth, and that would pave way for another 35 or 15 bps rate cut.
Shubhada Rao, Group President and Chief Economist, Yes Bank

Key Takeaways

  • MPC noted that global economic activity slowed since June.
  • Crude prices fell sharply since mid-May.
  • Gold prices rose propelled by increased safe-haven demand.
  • Developments highlight uncertainty of outlook.
  • Inflation remained benign across advanced, emerging economies.
  • Financial markets have turned volatile globally.
  • An easing policy stance commenced in February 2019
  • Stance of policy was changed in June.
  • Policy impulses have been transmitted by financial markets fully.
  • Expect higher transmission of policy rate cuts by banks going forward.
  • Government expenditure has picked up significantly.
  • Combined impact of measures taken by government and RBI will lead to growth revival in H2 FY20.
  • The base affect will also lead to higher growth in H2.
It’s very clear that there’s plenty of room more to go for a further rate cut, probably it’s also needed at this point in time.
Saugata Bhattacharya, Chief Economist, Axis Bank

Slowdown Structural Or Cyclical?

As we have already stated in the MPC resolution, there is a demand and investment slowdown and both put together are having a dampening effect on growth. We have ourselves reduced our growth projections to 6.9 percent with risks slightly to the downside. Now to go into whether it is a structural or a cyclical or a momentary thing is an aspect which requires deeper analysis. Our understanding is that at this point it is probably a cyclical slowdown, not really a deep structural slowdown. But nonetheless we have to recognize that there is room for structural reforms which need to be undertaken. But at this point of time, it would appear it is a cyclical slowdown and we are working on it. I think I mentioned it a little prematurely but that is our understanding at this point of time.

On Liquidity

  • RBI has injected substantial liquidity in system through combination of measures.
  • There is abundance of liquidity in system currently.
  • RBI committed to ensuring that sufficient liquidity is available.
  • RBI will use liquidity management measures to ensure liquidity is adequately provided.
  • Higher government expenditure is one of the contributors to higher systemic liquidity.
The systemic liquidity is adequate, but what you really need is perhaps is a dedicated liquidity window for NBFCs. It’s not necessary they all will utilise it, but it’s just a measure of providing comfort that there is liquidity available, exclusively from the NBFCs perspective.
Shubhada Rao, Group President and Chief Economist, Yes Bank

On Transmission Of Rate Cuts

  • We have had meeting with private, public sector banks.
  • System is flushed with liquidity.
  • The rate cuts by the RBI and liquidity injected have initiated cycle of transmission.
  • We have sense that there will be improvement in transmission.
  • In future steps required to ensure faster transmission will be taken.
  • Deposit growth with banks has been slow.
  • Better to allow the market forces to play with regard to rate transmission.
  • We will take a considered call on external benchmark for rates as required.
Whatever was cut in Feb has been fully transmitted. The banking system is in the process of transmitting the next 25 bps which were cut in the month of June... It takes time because banks do not borrow to lend in the market. In the coming couple of months, you’ll see the transmission of 50 bps shortly.
Ashutosh Khajuria, CFO, Federal Bank

On Credit Flow

  • Expect credit flow to revive on account of RBI’s measures on rates, liquidity.
  • Q4 growth projection is by and large in alignment with what MPC projected in June.
  • The lending activity by banks depend on their risk perception.
  • Can’t tell banks which loans to disburse.
  • RBI providing an enabling environment to ensure better credit flow.
  • Reduction of risk weights will ensure better credit flow.
  • Must remember that banks are just emerging from troubles related to NPAs.

No View On Sovereign Dollar Bond

  • The RBI and government discusses various issues including dollar bond.
  • For the moment, I would not like to express views on dollar bond.

Watch our full monetary policy coverage here - including the RBI Governor’s briefing and expert analysis.

Also read: RBI Will Introduce A Central Fraud Registry For Payments Systems

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