Monetary Policy: RBI Governor Shaktikanta Das On Growth, Liquidity, NBFCs

On Thursday, India’s Monetary Policy Committee voted to cut interest rates by another 25 basis points, citing significant weakness in growth impulses. The benchmark repo rate was cut to 5.75 percent from the current 6 percent. The reverse repo rate stands adjusted to 5.50 percent.

The MPC also changed its stance from 'neutral' to 'accommodative', suggesting it stands ready to cut rates further should economic conditions warrant it. This after it pared its growth estimate for 2019-20 to 7 percent from 7.2 percent earlier.

In the press briefing following the MPC three day meeting and decision, the Governor of the Reserve Bank of India, Shaktikanta Das said there is scope to reinvigorate private investment activity. He also spoke on maintaining “adequate liquidity” in the system and faster transmission of lower rates.

Key Comments From Shaktikanta Das

• Unanimous vote reflects resolve of the MPC to act decisively and in time.
• Financial markets have been unsettled by trade tensions.
• Crude prices have been volatile; EM currencies have depreciated.
• Accomodative stance basically means rate increase is off the table.
• IMD forecast is positive; food stocks are more than buffer requirements

Growth

Growth in eight core industries decelerated sharply in April, pulled down largely by coal, crude oil, fertilisers and cement.

Credit flows from banks to large industries strengthened, though they remained muted for micro, small and medium industries.

High frequency indicators suggest moderation in activity in the service sector.

Weak global demand due to escalation in trade wars may further impact India’s exports and investment activity.

Private consumption, especially in rural areas, has weakened in recent months.

However, on the positive side, political stability, high capacity utilisation, the uptick in business expectations in Q2, buoyant stock market conditions and higher financial flows to the commercial sector augur well for investment activity.

MPC notes that growth impulses have weakened significantly as reflected in a further widening of the output gap.

A sharp slowdown in investment activity along with a continuing moderation in private consumption growth is a matter of concern.

The headline inflation trajectory remains below the target mandated to the MPC.

There is scope for the MPC to accommodate growth concerns by supporting efforts to boost aggregate demand.

There is scope to reinvigorate private investment activity, while remaining consistent with flexible inflation targeting mandate.

Liquidity

Liquidity in the system turned into an average daily surplus of Rs 66,000 crore in early June after remaining in deficit during April and most of May due to restrained government spending.

The Reserve Bank injected liquidity of Rs 70,000 crore in April and Rs 33,400 crore in May on a daily net average basis under the LAF.

RBI has announced that it would conduct an OMO purchase auction of Rs 15,000 crore on June 13.

Internal working group has started working on liquidity framework review; report will be out by July.

RBI will ensure there's adequate liquidity in the system.

Transmission

Transmission of the cumulative reduction of 50 bps in the policy repo rate in February and April 2019 was 21 bps to the weighted average lending rate on fresh rupee loans.

However, the WALR on outstanding rupee loans increased by 4 bps as the past loans continue to be priced at high rates.

Interest rates on longer tenor money market instruments remained broadly aligned with the overnight WACR, reflecting near full transmission of the reduction in policy rate.

Expect there will be higher and faster transmission as we go forward.

New loans in consumer, consumer durable, auto sectors will have lower interest rates.

Real Interest Rate

• There has been a lot of discussion about real interest rates.
• Our decision is driven by inflation and growth concerns, in that order.
• MPC targets certain level of inflation, keeping in mind growth.
• Won't like to spell out what should be the real interest.
• It's for you to take a call on how close we are to the real interest rate.

NBFC Crisis

RBI does not regulate housing finance companies, but banks have exposure to the sector.

RBI is mandated to look after financial stability of the economy; have been closely monitoring developments in the NBFC sector, including housing finance companies.

Companies themselves are using various methods to meet their liabilities and commitments.

RBI will ensure that there's a robust, well-functioning NBFC sector.

Won't hesitate to take whatever measures needed to ensure financial stability isn't adversely impacted.

New NPA Resolution Framework

• Revised February 12 circular will be issued in the matter of next 3-4 days.
• It took more time than anticipated as it involved many legal questions

Watch the RBI press briefing here...