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RBI policy decision raises hopes for further easing: Experts

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Dion Global

07 Feb 2019

The Reserve Bank has created the much needed space to support financial activities by cutting the key repo rate by 0.25 per cent and raised hopes for further rate cuts, bankers and financial experts said Thursday.

The repo rate -- at which the RBI lends to banks and other financial institutions (FIs) -- has been reduced to 6.25 per cent, as per the decision taken by six-member Monetary Policy Committee (MPC) in its last bi-monthly policy announcement for 2018-19.

It will make home and other consumer loans cheaper as banks and FIs will free-up extra money for lending.

"MPC has clearly responded to the slack in financial markets in its credit policy. As the political cycle intensifies, monetary authorities have the onus to ensure financial sector stability and RBI seems to be focussed on it in deciding to cut the rates and complimenting it with other announcements regarding NBFCs credit assessment, raising limits for FPI for CP investments etc," said Rajni Thakur, Economist RBL Bank.

There was a space created by lower headline inflation and the RBI has used that space to support financial activities. With lower projections of inflation and growth going forward, there are all indications that MPC will look for opportunities to cut further in the cycle if space is available, she said.

The apex bank has also changed the definition of bulk deposits from Rs 1 crore to Rs 2 crore and raised the collateral free farm loans to Rs 1.60 lakh from Rs 1 lakh earlier.

SBI Managing Director Dinesh Khara said these are two important decisions of today's MPC meeting.

On the farm-loan decision, Khara said it will go a long way in easing the credit availability for farmers.

"It will go a long way in terms of mitigating the hardships for farmers because very often, in certain places it is heard that the farmers are unable to offer the collateral security. So in such cases, it (credit demand) will go up. Their (farmers) ability of raising money will go up. It will make the availability of loans easier for the farmers.

"I think these are two very important changes that have been announced in this policy. Bulk deposit have been increased....because earlier very often it was felt that it was not the level that we should start quoting, the preferred rates. So, I think the reasons are possibly this. But this is something, I think is more operational in nature and it will not have a much of an impact otherwise," Khara said.

Even as the RBI policy is hailed widely, some expected a bigger rate cut, to the extent of 0.50 per cent.

Industry body Ficci welcomed the RBI policy saying there is also a firm recognition of the need to strengthen private investment activity and buttress private consumption.

"While FICCI had hoped for a larger cut in the repo rate, we believe that the cut of 25 basis points will be followed up with more such measures in the subsequent months," it added.

PropTiger.com said the industry was expecting a bigger rate cut than announced. As headline inflation is way below target, MPC could have given 50 bps (basis points/0.50 per cent) relaxation to industry.

"It would have helped accelerate sales growth in residential real estate which is a major contributor to economy. Change of stance to neutral is positive as it means we can look forward to future rate cuts," said Ankur Dhawan- Chief Investment Officer-PropTiger.com.

Pranjul Bhandari - Chief India Economist, HSBC - said the policy has opened up the space, however, one should not get carried away as doles announced in the Budget have to be watched carefully.

Now going forward I think, there is a possibility that there could be further easing. But I don't think we should get carried away because we still have a lot of fiscal uncertainties. The whole direct cash transfer train has left the station. The Centre has announced it, many states have also announced and many states are announcing, she said.

"That may have inflationary consequences. So, we have to keep all these in mind as well. While there is some space that could have opened up but we should not get too carried away by that," Bhandari added.

Jayesh Mehta MD & Country Treasurer, Bank of America, said: "We do expect rate cut to really happen going forward".

"RBI acts dovish on rates. Bringing down the inflation expectation numbers by 60 bp and a rate cut of 25 bp are progressive steps. More rate cuts are expected in the next meeting, as RBI has changed its policy stance to neutral amidst lower inflation targets under the current high crude oil prices environment," said Abhishek Bansal, Chairman of ABans Group of Companies.

Engineering Export Promotion Council of India (EEPC India) urged the RBI to ensure transmission in policy rate cut.

"The banks must be asked to ensure transmission of the reduction in interest rates to the borrowers, particularly exporters, who are facing several global challenges besides the rising cost of output," said Ravi Sehgal, EEPC India Chairman.