RBI on Wednesday summoned all its monetary policy prowess to cut repo rate by an unconventional 35 basis points, or 0.35 per cent. Coming soon after the abrogation of Article 35A, the 35-bp cut left policy watchers slack-jawed. The repo rate, at which banks borrow from RBI, now stands at a 9-year-low of 5.4%, but isn’t reason enough to rejoice.
For, Wednesday’s policy action is RBI’s way of saying economic slowdown is getting worse. What Governor Shaktikanta Das did not elaborate was how the little extra of 10 bps would make up for the inadequacy of a traditional 25-bp cut, or for the excessivenes of 50 bps.
Economic growth is squeezed due to global and domestic factors, but Das is rather sanguine, lowering FY20 GDP forecast by a mere 10 bps to 6.9 per cent. Analysts, however, are doubtful. “While there are positive near-term data to buttress RBI’s assessment, the system is experiencing a remarkable lack of growth drivers in an uncertain world. Hence, we think there’s scope for significant disappointment to RBI’s current forecast for growth,” said Suyash Choudhary, head – fixed income, IDFC AMC.
Also, repo rate reduction alone will not fundamentally boost demand. The real deal lies with banks and unless they lower interest rates, credit growth will continue to slump. SBI was quick to lower MCLR (interest rate below which the bank can’t lend) by 15 bps soon after RBI’s policy review, but that amounts to nothing. Since February, repo rate fell by 110 bps (1.1 per cent), while SBI’s lending rates corrected by just 30 bps.
It means, despite the lower cost of money, RBI’s ultra-easy monetary policy failed to revive demand and investment. Sensing that Wednesday’s 35-bp transmission may not come in time for festive season buying, Das walked an extra mile easing banks’ risk weights on unsecured personal loans freeing up capital to lend, and classified NBFC credit to agriculture, MSMEs and housing as priority sector lending.
But whether RBI can ease the slowdown pain by itself is open to question, as views are divided if the downturn is cyclical or structural. While the former can drag growth for a few quarters, the latter persists longer.
Das admitted it ‘needs deeper analysis’. The dominant view is that real interest rates are steep, which is why Finance Minister Nirmala Sitharaman sought “significant rate cuts”. With the banking regulator doing its bit, it is the government’s turn now to pursue a countercyclical fiscal policy by increasing expenditure and reducing taxes to arrest the deepening slowdown.
Other decisions
The Reserve Bank plans to create a central payments fraud information registry bbps to cover all repetitive bill payments RBI has decided to cover all repetitive bill payments under the Bharat Bill Payment System (BBPS). The guidelines will be issued in September.
Currently, repetitive bill payments cover DTH, electricity, gas, telecom and water bills under the BBPS — which is an inter-operable platform neft will be available 24x7 from December. RBI has decided to allow round-the-clock fund transfers through NEFT from December in order to promote digital transactions.
Currently, the National Electronic Funds Transfer, operated by the central bank, is available from 8 am to 7 pm on working days. The NEFT system is used for fund transfers up to Rs 2 lakh