MONETARY POLICY – PATEL TO DAS; HAWKISH TO DOVISH

The new RBI Governor, Shaktikanta Das was under the magnifying glass. This was his first monetary policy meet and all wanted to see only one thing – is he a “yes” man or can he stand tall on his own? Given the unceremonious way in which his predecessor had left, all eyes were trained on Das.

And as against wide spread expectations from analysts of a status quo, the RBI Governor brought down interest rates by 25 bps. Not just that, inflation forecasts have been reduced further, leaving more room for further policy accommodation. As against Urjit Patel’s stance of “calibrated tightening,” Das changed it to “neutral.” Well, just like the Union Budget, the RBI policy is also election ready!

Somehow, the rate cut seems to have been made in urgency, almost as if the RBI expected inflation to fall below 2% or maybe the growth is languishing so much, it needed to cut rates immediately to push growth up. We are the fastest growing economy in the world yet we are getting so much stimulus to stoke growth further – first the Budget and now RBI!

Well, it’s good that rate has been cut but what irks is that it seems more at the behest of the Govt; the very reason why Patel left and Das was put in. Given the expansionary Budget which will stoke consumer spending and in turn, inflation; volatile crude oil prices, plus the third time missing of the fiscal deficit target and agriculture expected to become a huge worry this year, a rate cut at this juncture is more about spreading the same Budget type “feel good” factor.

With inflation reined in, the Governor has decided to pay attention to growth – this policy, the RBI said is about promoting growth and aid the fragile financial sector.

Highlights of the policy:

• Reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 6.5 per cent to 6.25 per cent with immediate effect.
• The reverse repo rate under the LAF stands adjusted to 6.0 per cent
• Marginal standing facility (MSF) rate and the Bank Rate now stands at 6.5 per cent.
• The MPC also decided to change the monetary policy stance from calibrated tightening to neutral.
• Assuming a normal monsoon in 2019, the path of CPI inflation is revised downwards to 2.8 per cent in Q4FY19; 3.2-3.4 per cent in H1FY20 and 3.9% in Q3FY20, with risks broadly balanced around the central trajectory.
• GDP growth for 2019-20 is projected at 7.4 per cent – in the range of 7.2-7.4 per cent in H1, and 7.5 per cent in Q3 – with risks evenly balanced.
• The decision to change the monetary policy stance was unanimous.
• As regards the reduction in the policy repo rate, Dr. Ravindra H. Dholakia, Dr. Pami Dua, Dr. Michael Debabrata Patra and Shri Shaktikanta Das voted in favour of the decision. Dr. Chetan Ghate and Dr. Viral V. Acharya voted to keep the policy rate unchanged.
• The next meeting of the MPC is scheduled from April 2 to 4, 2019.

A complete turnaround in stance and outlook within a couple of months; were Patel and Das looking at the same numbers and country?

Now what we need to see is whether the banks and NBFCs will pass on the benefit of this rate cut to people. Will the EMIs come down?  Home loans are reportedly being offered at over 9% and car loans at over 10.5% to 11%. So will this 25 bps bring down these rates? Maybe the PSU banks at the behest of the Govt but NBFCs and private sector banks?