By Ruma Dubey
Wow!! A 50 bps point rate cut! At a time when Janet Yellen disappointed the world, our very own Governor literally took everyone by surprise with an unexpected generous 50 bps rate cut.
Low inflation due to global factors, better inflation management despite poor rainfall is what has prompted the RBI to get so generous. Another positive here is that the RBI has indicated that the policies ahead will remain accommodative and another 50 bps rate cut cannot be ruled out in 2016.
A quick look at the highlights of the RBI policy:
- Reduced the policy repo rate under the liquidity adjustment facility (LAF) by 50 basis points from 7.25 per cent to 6.75 per cent with immediate effect.
- Kept the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liability (NDTL).
- Continue to provide liquidity under overnight repos at 0.25 per cent of bank-wise NDTL at the LAF repo rate and liquidity under 14-day term repos as well as longer term repos of up to 0.75 per cent of NDTL of the banking system through auctions.
- Reverse repo rate under the LAF stands adjusted to 5.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 7.75 per cent.
- Despite the monsoon deficiency and its uneven spatial and temporal distribution, food inflation pressures have been contained by resolute actions by the government to manage supply.
- Inflation is likely to go up from September for a few months as favourable base effects reverse. CPI inflation is expected to reach 5.8 per cent in January 2016, a shade lower than the August projection.
- GDP projected for 2015-16 is marked down slightly to 7.4 per cent from 7.6 per cent earlier.
- Both the SLR and the HTM ceiling will be brought down by 0.25 per cent every quarter till March 31, 2017.
- Allows Indian corporates to issue rupee denominated bonds with a minimum maturity of five years at overseas locations within the ceiling of foreign investment permitted in corporate debt (US$ 51 billion at present). There shall be no restriction on the end use of funds except a small negative list. Detailed instructions are being issued separately.
- Increases limits for FPI investment in debt securities and will henceforth be announced/ fixed in rupee terms. Increase in limits will be announced every half year in March and September and released every quarter.
- The next RBI policy will be held on 1st December.
It is now upto the banks to transmit the rate cut. The RBI itself stated in the statement that median base lending rates of banks have fallen by only about 30 basis points despite extremely easy liquidity conditions. This is a fraction of the 75 basis points of the policy rate reduction during January-June, even after a passage of eight months since the first rate action by the Reserve Bank. Bank deposit rates have, however, been reduced significantly, suggesting that further transmission is possible. Will banks react and reduce rates? Realty, auto and housing finance stocks are already celebrating, sure that EMIs will come down thus boosting demand.
The markets were down over 300 points just before the policy was announced and when the 50 bps rate cut was announced, the market bounced back sharply. One would have expected the market to spike up given the fact that it had hinged all its energies on this event today but it remains wishy-washy, up less than 50 points after the policy and now actually in the red. Thus for the market, this event is over and it is now looking ahead for the next trigger.
It was great to know that the RBI Governor very categorially stated that what the US Federal Reserve does is not central to decision making in India. And Rajan said that RBI will work with the Govt to ensure that the 125 bps rate cut is transmitted. Now that will most certainly spurt up the much needed growth.
Rajan has done his job and now it’s the turn of the Govt.