Asks banks to pass on benefit to home/auto EMIs; markets hoped more, fall
The Reserve Bank of India (RBI) on Thursday slashed its benchmark lending rate by 25 basis points to a nearly nine-year low of 5.75 per cent providing relief to industry as well as EMI payees in home, auto and other sectors, but the Central bank’s failure to assuage investors concerns regarding the NBFC sector triggered a massive sell-off in the stock market which suffered biggest one-day fall in 2019. The reverse repo rate under stands at 5.50 per cent.
The third rate cut this year brought the interest rates to their lowest level in nine years even as the RBI changed its stance to “accommodative” from “neutral”, opening up the possibility of another cut in the coming months to infuse some life into the economy growing at the slowest pace since Modi came to power in 2014.
The RBI said it has done away with charges on fund transfers through RTGS and NEFT routes to boost digital transactions and asked banks to pass on the benefits to customers. SBI charges between Rs 1 and Rs 5 for transactions through NEFT and between Rs 5 and Rs 50 for RTGS route.
Significantly, all the six members of the Monetary Policy Committee (MPC) voted unanimously for a rate cut and switching of its stance to “accommodative” from neutral. RBI Governor Shaktikanta Das said the shift in the stance meant that an increase in interest rates is “off the table.”
He wanted banks to expedite the transmission of the current reduction in rates as well as similar ones that happened in February and April. “Our decision is driven by growth concerns and inflation concerns in that order,” Das told reporters here. “The unanimous vote reflects the resolve of the monetary policy committee to act decisively and act in time (to address the growth concerns).”
In three back-to-back bi-monthly monetary policies this year, the RBI has lowered interest rates by 75 basis points. With India’s GDP growth slipping to a five-year low of 5.8 per cent in the January-March quarter — the first instance of growth falling below China’s in last few quarters — the RBI lowered its growth forecast for the economy to 7 per cent from the April view of 7.2 per cent for the 2019-20 April-March.
“Growth impulses have weakened significantly as reflected in a further widening of the output gap compared to the April 2019 policy,” the RBI said in the monetary policy statement.
The reduction in interest rate will help boost credit growth, helping arrest the slowdown in the economy ahead of new Finance Minister Nirmala Sitharaman presenting Modi-2.0 Government’s first Budget next month that is widely expected to announce measures to generate jobs and revive the economy.
Some analysts have stated that given the large undershoots in the actual revenue collections in FY2018-19 versus even the revised numbers presented in February, the numbers targeted in the interim Budget are looking truly daunting. This is especially in context of the ongoing growth slowdown. Sitharaman has a tall task to present a credible Budget while sticking to the assumed deficit target.
Das seemed to have a reasonably benign view on Government finances, underplaying the recent stress and instead focused on the consolidation underway over the past few years.
He was not unduly concerned about PSU borrowings saying that borrowings done by state-owned firms who have own revenue streams should not be looked upon as government borrowing. Given very large buffer stocks (3.4 times the norm), there seems to be less of a concern from an inflation perspective, in case monsoons turn out to be weaker.
While inflation remained below its medium-term target to give “scope” to the MPC “to accommodate growth concerns by supporting efforts to boost aggregate demand”, the RBI marginally revised upwards its retail inflation forecast for the first of FY2019-20 to 3-3.1 per cent (2.9-3 per cent earlier), but is a shade lower for the second half at 3.4-3.7 per cent (3.5-3.8 per cent earlier).
The MPC noted that political stability, high capacity utilisation, buoyant stock markets, an uptick in business expectations in the second quarter and financial flows are positive from a growth perspective.
It made its disappointment clear at the transmission of rate cuts, saying the weighted average lending rate has gone down by only 0.21 per cent, while the same for older loans has increased 0.04 per cent, as against policy rate cuts of 0.50 percentage point.
As market hoped for a bigger rate cut and concrete steps to address NBFC crisis, Sensex cracked 553.82 points, or 1.38 per cent, to settle at 39,529.72, pressured by losses in banking, energy and capital goods stocks. The broader NSE Nifty plunged 177.90 points, or 1.48 per cent, to end at 11,843.75.
The previous biggest drop this year was on April 22, when the Sensex had dived 495.10 points while Nifty had lost 158.35 points.