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RBI cut-Now Banks come in action

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The Monetary Policy Committee (MPC) decided to cut the Repo rate by 25 bps to 5.75 per cent unanimously and decided to change the monetary policy stance from neutral to accommodative. For FY20, RBI again cut its GDP growth forecast by 20 bps to 7.0 per cent, in first half year 6.4-6.7 per cent and in second half year 7.2-7.5 per cent, owing to weak investment activity, weak global demand, and moderation in private consumption.

In the last two policies, RBI cut its growth forecast by 40 bps. RBI more or less kept CPI inflation for FY20 at the same level with 3.0-3.1 per cent in first half year of FY20, earlier it was 2.9-3.0 per cent in the first half-year of FY 20 and 3.4-3.7 per cent in second half year of FY20, earlier it was 3.5 to 3.8 per cent. However, there are risks related to the monsoon, vegetable prices, crude oil, geopolitical tensions, financial market volatility, and the fiscal scenario.

Global economic growth has lost pace after the first quarter of FY 19, reflecting a further slowdown in trade and manufacturing activity. Loss is growth is fairly widespread across both advanced and emerging economies. The loss in momentum in quarter fourth growth can be attributed partly to a slowdown in exports. Weak global demand due to an escalation in trade wars may further impact India’s exports and investment activity.

The relationship between system liquidity and deposit rates is clearly visible in the historical data. Liquidity was in surplus mode between November 16 and December 17 and at the same time, average term deposit rate in less than one year declined by 525 basis points. Meanwhile, when the liquidity started declining and moved to deficit mode from April 18 to December 18, banks increased the deposit rates by 375 basis points.

Leverage Ratio is calculated by dividing Tier 1 capital by the bank’s total exposure. The tier 1 leverage ratio is used as a tool by central monetary authorities to ensure the capital adequacy of banks and to place constraints on the degree to which a financial company can leverage its capital base. As per the framework on LR put up by RBI, the banks were monitored against an LR of 4.5 per cent as the final guidelines were not announced. Since most of the banks are maintaining a higher LR requirement, the bringing down of the ratio would give a scope of further enhancing exposure in assets and non-balance sheet items.

RBI currently manages systemic liquidity based on the guidelines of Liquidity Management Framework 2014. Given the focus that liquidity management has generated in the recent times and RBI’s tinkering with new ways of injecting durable liquidity, the time is right for putting in place a comprehensive policy which is easily accessible to all the market participants and will help in the uniform assessment of systemic liquidity needs. While analysing data, for 64 NBFCs with loans and advances above Rs 100 crore, who have reported their cash and bank balance, we observed that, while loans and advances have increased by around 8 per cent from September 18 level, cash and bank balance increased by around 53 per cent as on March 19. Moreover, the growth is mainly seen in Government-backed NBFCs like Power Finance, REC, LIC housing Finance, etc.

In the developmental and regulatory policies, in order to harmonize our standards with Leverage Ratio standards of Basel III, RBI has decided to keep the minimum requirement of 4 per cent for DSIBs and 3.5 per cent for other banks. Since most of the banks are maintaining a higher LR requirement, the bringing down of the ratio would give a scope of further enhancing the exposure in assets and non-balance sheet items. RBI has also scrapped transaction charges for RGS and NEFT. In a positive development for small and medium forex clients, RBI has also announced the launch of the online trading platform for retail participants.

Under the current scenario, it would be pertinent to ponder whether financial instability should be thought of only as something that impedes the attainment of the inflation goals over time, or does society directly care about financial stability for other reasons. In view of the above, we can say that the RBI decided to cut Repo rate by 25 bps with a unanimous vote of 6-0, which is largely on expected lines. For FY20, GDP growth forecast has been cut by 20 bps to 7.0 per cent by the RBI.

– Satish Singh

(Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of AFTERNOON VOICE and AFTERNOON VOICE does not assume any responsibility or liability for the same.)
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