RBI monetary policy: Rate cut to boost growth

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Published: June 7, 2019 12:42:11 AM

Global growth remained sluggish across both advanced and emerging markets. Global yields have fallen significantly.

RBI monetary policy, Rate cut, policy repo rate, Global growth, BCBS, inflation, global economic indicators, India’s banking sectorThe tone of the policy statement indicates RBI is concerned about slowing growth, while being adequately comfortable about inflation estimates.

RBI’s MPC agreed to reduce the policy repo rate by 25bps to 5.75% and change the policy stance to ‘accommodative’ from ‘neutral’. This was broadly in line with market expectations. From a monetary policy perspective, the stated objective of RBI has been inflation-targeting and supporting growth. The tone of the policy statement indicates RBI is concerned about slowing growth, while being adequately comfortable about inflation estimates. This being the case, RBI highlighted there is scope for MPC to support efforts to boost growth and consumption; in particular private investment activity.

Global growth remained sluggish across both advanced and emerging markets. Global yields have fallen significantly. Crude has also fallen from its highs and is likely to be range-bound in the near-term. Domestic economic activity decelerated sharply to 5.8% in Q4FY19 from 6.6% in Q3FY19 and 8.1% in Q4FY18, with growth in private consumption also slowing. Also, high frequency indicators point to a slowdown in the services sector. Exports have been impacted due to weak global demand, partly due to the uncertainties surrounding trade wars. Thus, GDP growth in FY19 was at 6.8%, coming in lower than estimates.

RBI estimated FY20 GDP growth at 7% (7.2% earlier), 6.4-6.7% in 1HFY20 (6.8-7.1% earlier) and 7.2-7.5% in 2HFY20 (7.3-7.4% earlier). Upside risks to inflation include uncertainties related to monsoon, increase in vegetable prices and higher crude oil prices amid geopolitical tensions. RBI has ensured adequate liquidity in the system; it said it would conduct OMO purchase auction of Rs 15,000 crore to inject liquidity into the system on June 13.
To maintain financial stability, RBI has set the minimum leverage ratio at 3.5% for all Indian banks and 4% for systemically-important banks. This is higher than the minimum leverage ratio of 3% mandated by the Basel Committee on Banking Supervision (BCBS) and will inspire confidence in India’s banking sector.

RBI announced it will issue draft guidelines for ‘on tap’ licensing of small finance banks and a committee will be formed to look into ATM charges. Overall, against the backdrop of a stable government, higher capacity utilisation and expectations of fiscal stimulus to boost growth, RBI will keep a close watch on the Budget, as well as other key data points including the monsoon, global economic indicators, geopolitical equations, crude oil prices as well as domestic growth and inflation estimates to plan its next move.

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