Monetary policy meet: RBI says more liquidity, cuts repo rate by 25 bps

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Published: June 7, 2019 6:29:29 AM

RBI governor Shaktikanta Das said the RBI was committed to maintaining financial stability and would take whatever steps were necessary.

Monetary policy meet, RBI , NBFC, HFC, HFC, food prices, rate hikes“RBI does not regulate NBFCs and HFCs but nonetheless banks have exposure to these entities and RBI is mandated to ensure financial stability,” Das observed in the post-policy press conference.

With growth sputtering and inflation benign, the Reserve Bank of India (RBI) has turned distinctly dovish. On Thursday, the central bank trimmed the repo by 25 basis points, making it clear rate hikes were off the table and assured markets of ample liquidity.

However, the stock markets crashed because the rate cut had been priced in and no specific support measures were offered to bail out some near-insolvent NBFCs and HFCs to which both banks and mutual funds have large exposures. Moreover, the central bank pruned the growth rate for 2019-20 to 7%, acknowledging the weakness in the economy and the fall in capacity utilisation to 75.2%.

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RBI governor Shaktikanta Das said the RBI was committed to maintaining financial stability and would take whatever steps were necessary. “RBI does not regulate NBFCs and HFCs but nonetheless banks have exposure to these entities and RBI is mandated to ensure financial stability,” Das observed in the post-policy press conference.
The RBI governor was confident the liquidity support would see transmission taking place faster than in the past when it had taken between four and six months; the 50 basis points cut (in February and April) has resulted in the weighted average lending rate falling by 21 basis points.

He was, however, also non-committal on whether the government would cut interest rates on small savings which would help banks cut interest rates on deposits. Bonds, which have been rallying for several sessions now in anticipation of a rate cut, were cheered and the benchmark yield fell to 6.93.

Yields are expected to remain at sub-7% with the RBI governor saying accommodative meant rate hikes are off the table. Most economists expect two more rate cuts in the next six months if food prices stay in check.

However, market watchers were quick to point out the RBI didn’t pull up the Centre for the large extra-budgetary borrowings, which were masking the exact level of the fiscal deficit and crowding out private sector borrowings. Governor Das observed that the government had stuck to the fiscal glide path in the last few years. Also, Das said many of the public sector units borrowing to invest could repay the loans from their revenue streams.

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