RBI POLICY – THIS ONE IS NOT ABOUT INTEREST RATES!

There weren’t too many hopes to begin with and RBI’s status quo did not come as a surprise. But more than the actual policy statement, the additional Statement on Developmental and Regulatory Policies was the moot – it was almost like a mini-Budget, with the RBI finally stepping up with sops for the realty, auto and MSMEs. Like the odd 35 bps rate cut, RBI Governor, Shaktikanta Das has once again showed that he does the unexpected and loves to spring surprises!

With the retail inflation for Dec coming in at 7.35% which is much higher than RBI’s target of 6% at the upper level, a non-action was the best action as far as interest rate decision was considered. Its dovish stance remained.

For most of us ignoramus kinds, for the records, dovish means the RBI is willing to be accommodative and eyes are trained on growth and would take steps to stimulate growth. On the other hand, hawkish means the Governor is looking at tightening the rates as RBI feels that the economy needs to be cooled and biggest reason of all – inflation remains the main and only target; thus with an eye on inflation, the stance is very focused on only controlling the prices. Currently, inflation rise is seasonal and thus RBI expects prices to come down soon.

All eyes were on growth and inflation targets. GDP FY20 forecast remains at 5%. Growth forecast for FY21 is at 6% - in the range of 5.5% to 6% in HIFY21 and 6.2% in Q3.

And CPI projection is revised upwards to 6.5% for Q4FY20, at 5.4 to 5% for H1FY21 and 3.2% for Q3FY21. So the good news here – by Q3FY21, the RBI expects growth to pick up and inflation to fall, finally getting on track.

Highlights of the policy:

• Keeping the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 5.15%
• Consequently, the reverse repo rate under the LAF remains unchanged at 4.90%
• Marginal standing facility (MSF) rate and the Bank Rate at 5.40%
• MPC also decided to continue with the accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target.
• The MPC anticipates headline inflation to remain elevated in the short-run, at least through H1:2020-21.

Highlights of Developmental and Regulatory Policies:

• The daily fixed rate repo and four 14-day term repos every fortnight being conducted, at present, are being withdrawn
• A 14-day term repo/reverse repo operation at a variable rate and conducted to coincide with the cash reserve ratio (CRR) maintenance cycle would be the main liquidity management tool for managing frictional liquidity requirements.
• Reserve Bank will conduct, if needed, longer-term variable rate repo/reverse repo operations of more than 14 days.
• The current requirement of maintaining a minimum of 90 per cent of the prescribed CRR on a daily basis will continue
• Standalone Primary Dealers (SPDs) would be allowed to participate directly in all overnight liquidity management operations.
• Reserve Bank shall conduct term repos of one-year and three-year tenors of appropriate sizes for up to a total amount of Rs.1,00,000 crore at the policy repo rate.
• Scheduled commercial banks will be allowed to deduct the equivalent of incremental credit disbursed by them as retail loans for automobiles, residential housing and loans to micro, small and medium enterprises (MSMEs), over and above the outstanding level of credit to these segments as at the end of the fortnight ended January 31, 2020 from their net demand and time liabilities (NDTL) for maintenance of cash reserve ratio (CRR). This exemption will be available for incremental credit extended up to the fortnight ending July 31, 2020.
• RBI to link pricing of loans by scheduled commercial banks for the medium enterprises also to an external benchmark effective April 1, 2020
• To extend the benefit of one-time restructuring without an asset classification downgrade to standard accounts of GST registered MSMEs that were in default as on January 1, 2020.
• The restructuring under the scheme has to be implemented latest by December 31, 2020.
• This will benefit the eligible MSME entities which could not be restructured under the provisions of the circular dated January 1, 2019 as also the MSME entities which have become stressed thereafter. It is re-emphasised that this is a one-time regulatory dispensation.
• RBI to permit extension of date of commencement of commercial operations (DCCO) of project loans for commercial real estate, delayed for reasons beyond the control of promoters, by another one year without downgrading the asset classification, in line with treatment accorded to other project loans for non-infrastructure sector.
• To allow regional rural banks (RRBs), like other commercial banks, to act as merchant acquiring banks, using Aadhaar Pay – BHIM app and POS terminals
• All rupee interest rate derivative (IRD) transactions of market makers and their related entities globally, shall be accounted for in India.
• To issue the directions regarding exchange of variation margin (VM) for non-centrally cleared derivatives (NCCDs) by end-March 2020

This is a great step coming in from RBI, where probably for the first time, we are understanding that RBI is so much more powerful and its not merely an interest rate controller.

The market is very happy with these initiatives and with the RBI showing its strong intent to spur growth, the moods are optimistic. With these steps and the various stimuli given by the FM, in the months ahead, as forecast by RBI, by next year this time, we might be looking at a complete turnaround in the economic picture of India.