The Reserve Bank of India (RBI) on Tuesday ushered in the new monetary policy regime with a 6-0 verdict in favour of a 25 basis point interest rate cut, a modest decision that was historic in more ways than one.
This was the first rate cut in six months and from 6.50 per cent, the repo rate stands at 6.25 per cent now.
This was also the first time that instead of the RBI Governor, a six-member Monetary Policy Committee (MPC) — three from the RBI and three nominated by the Government — decided on the rate cut.
In another first, the announcement took place at 2.30 pm instead of the usual 11 am, which gave traders enough time to speculate during the day. This was reflected in the see-saw movement on the bourses.
For the first time, the duration of the RBI Governor’s media interaction was cut short after the Monetary Policy Review meet. Also, the customary post-policy conference-call with analysts took place at 4.30 pm as per schedule, but the RBI was not part of it.
For experts it was a tough call to guess the decision of such a diverse panel. In fact, the stock market was not hopeful of a rate cut. As such, the bank Nifty remained in negative zone for the better part of the day, resurrecting only after the policy announcement.
Dalal Street also welcomed the move and most key stocks, including banking, spiked. The benchmark Sensex rose over 91 ending at 28,334.55 points.
After a two-day review meeting, RBI Governor Urjit Patel made a low-profile debut in sharp contrast to his outspoken predecessor Raghuram Rajan.
Patel, who took over as the 24th RBI Governor a month ago, started off his first media interaction by reading out the reasons for a change in policy announcement timing.
“The policy announcement had to be pushed to 4.30 pm due to logistics reasons under the new MPC regime and the late afternoon timing was in sync with many other central banks,” Patel explained.
Surprisingly, participants like bankers, journalists and economists remained in listen-only mode throughout, as against the earlier practice of some questions being allowed to them.
The rate cut came as a Diwali bonanza for loan seekers, be it home, automobile or corporate loans which may get cheaper to some extent. It also came at a time when there was a clamour for slashing interest rates, especially after the departure of Rajan, who was often accused of stifling growth by keeping rates too high.
With Tuesday’s reduction, all other rates, reverse repo rate, bank rate and Marginal Standing Facility stand reduced by similar percentage points to 5.75 per cent, 6.75 per cent and 6.75 per cent respectively.
The repo rate, at which RBI lends to banks, was 6.25 per cent in November 2010. It peaked to 8.5 per cent in October 2011.
Within minutes of the RBI policy announcement, the Government welcomed the rate cut saying it will boost liquidity and help achieve 8 per cent GDP growth.
“The Government has announced several measures to cool food inflation pressures, especially with regard to pulses. These measures should help in moderating the momentum of food inflation.
This has opened up space for policy action, as indicated in the third bi-monthly monetary policy statement,” Patel said in the fourth bi-monthly monetary policy review for 2016-17.
“The RBI’s current rate cut along with reduction in small savings rates by the Government will encourage banks to pass on the benefit to borrowers,” Patel said, adding that easy liquidity conditions engendered by the RBI’s operations should also enable the smooth transmission of policy action through various market segments.
Finance Secretary Ashok lavasa said the RBI policy would boost liquidity in the system and the Central bank as well as the Government is in sync with the inflation target. “On the whole, this is a decision that will go down well with all sections of the economy,” lavasa said.
Within hours, private sector lender ICICI Bank took the lead with a 0.05 per cent reduction in its marginal cost of funds-based lending rate to 9.05 per cent.
According to the RBI the MPC, took note of potential cost push pressures that may emerge, including the 7th Pay Commission award, on house rent allowances, and the increase in minimum wages with possible spillovers through minimum support prices. The fuller play of these factors will need vigilance to prevent a generalised cost spiral from taking root.
“On balance, the committee envisages a trajectory taking headline CPI inflation towards a central tendency of 5 per cent by March 2017, with risks tilted to the upside albeit lower than in the second and third bi-monthly monetary policy statements of June and August respectively,” Patel said.
On the GDP forecast, he said, the momentum of growth is expected to quicken with a normal monsoon raising agricultural growth and rural demand, as well as by the stimulus to urban consumption spending from the Pay Commission’s award.
On price rise front, the RBI warned of risks to growth next year but sounded optimistic on meeting the Parliament-mandated inflation target of 2-6 per cent in the current financial year.
“The inflation outlook for 2016-17 has improved, but close vigilance is required to achieve the prospects of reaching 4 per cent. Robust consumption brightens the outlook for real gross value-added growth in 2016-17, but muted private investment and weak global demand may restrain the pace of growth in 2017-18,” the RBI said.
On the non-performing assets (NPA) issues, Patel said, “NPAs are an important issue. We will deal with the situation with firmness, but also with pragmatism, so that the economy does not feel any lack of credit to support growth. You must remember that the situation did not happen overnight and therefore will require skill and thoughtful endeavour to resolve.”