The first bi-monthly monetary policy review of the Reserve Bank of India (RBI) has veritably lived up to the widespread expectation of an expected rate cut to cheer up the various sectors of the vibrant Indian economy. This was made possible with retail inflation remaining soft and the overwhelming need to give an impetus to growth by fostering an enabling environment by the disbursal of adequate flow of capital at affordable cost to all the productive segments.
The Monetary Policy Committee (MPC) meeting in Mumbai cut the ‘repo rate’ or the rate at which RBI lends to banks by 25 basis points to 6 per cent. This is the second successive rate cut from the central bank under new Governor Shaktikanta Das, after a surprise cut in February. The latest rate cut is to tide over the weakening economic growth manifest in tepid industrial and export growth in the initial months of 2019. The MPC also decided to maintain a neutral policy stance the meaning of which is to adjust policy rate either way assessing the trajectory of inflation. Significantly, while retail inflation — the central bank’s main yardstick for policy making — rose to a four-month high of 2.57 per cent in February, it is still below the RBI’s medium-term target of 4 per cent.
The RBI also lowered its growth outlook for the current fiscal to 7.2 per cent, lower than its February projection of 7.4 per cent. It recalled that while GDP growth for 2019-20 in the February policy was projected at 7.4 per cent – with risks evenly balanced, there are some signs of domestic investment activity weakening as reflected in a slowdown in production and imports of capital goods. The moderation of growth in the global economy might impact India’s exports. But on the positive side, higher financial flows to the commercial sector augur well for economic activity. Private consumption, which has remained resilient, is also expected to get a fillip from public spending in rural areas and an increase in disposable incomes of households due to tax benefits. Business expectations continue to be optimistic. Taking into consideration all the positive factors, GDP growth for 2019-20 is projected at 7.2 per cent – with risks evenly balanced for 2019-20.
Alongside, the RBI also unveiled a raft of developmental and regulatory policies. Thus, it has resolved to defer the introduction of an external interest rate benchmark to allow for smoother transmission of interest rates from the central bank to a commercial bank’s lending rates. This gives commercial banks some additional breathing room. The RBI Governor clarified that the central bank will issue a fresh circular to banks on how to deal with non-performing assets (NPAs), following the Supreme Court’s verdict earlier this week, setting aside the regulator’s (RBI) earlier circular of February 2018. The RBI had mandated lenders to take defaulters to bankruptcy courts in case they failed to institute a rescue plan within six months.
The RBI Chief made it categorical that it will be the apex bank’s continuing efforts to ensure that there is adequate liquidity available in the system to take care of the credit requirements of all the stakeholders. It is also salutary that the RBI would use all tools of infusing liquidity, including open market operations (OMO) and currency swap. A task force is to be set up to find out the best practices for fostering a secondary market for corporate loans, which would be crucial for managing credit risks. Now, domestic payment systems would be benchmarked to their global peers to help plug the lacunae in local payment platforms. RBI hopes this move will give further spur to the deepening of digitization in the country.
The long and short of the policy is that the formal channels of credit for the different sectors stand ready to bolster and ensure robust growth duly supervised by the RBI.
Script: G. Srinivasan, Senior Economic Journalist