MUMBAI: There is nothing sacrosanct about the slab of 25 basis points or 0.25 per cent, a standard that the Reserve Bank of India (RBI) followed even in the last three policies when the repo rates were cut consecutively by 25 bps. On Wednesday however, it cut the repo rates by 35 bps. There are global precedents, and the central bank’s Monetary Policy Committee (MPC) viewed 35 bps as a balanced level of rate cut under the current circumstances, RBI governor Shaktikanta Das said after the MPC meeting.
While the rate cut decision was unanimous, four MPC members voted for 35 bps cut, and two of them stuck to 25 bps.
RBI also promised to keep liquidity in surplus so that the rate cuts are passed on by the lenders. Pledging its support for growth, the MPC statement said, “Boosting aggregate demand, especially private investment, assumes the highest priority at this juncture while remaining consistent with the inflation mandate.”
Markets have viewed the rate cut as meagre amidst slowdown across sectors. However, the governor’s insistence on keeping the policy stance “accommodative” has kept hopes of further rate cuts alive. “The RBI has painted a reasonably gloomy picture for the economy and the 35 bps cut seems to suggest that it concedes the fact that the extent of the slowdown is sharper than it had projected earlier, although it does not see the need to push the panic button (that a 50 bps might have been interpreted as),” said Abheek Barua, chief economist, HDFC Bank.
There has only been a marginal improvement in transmission of 75 bps policy rate cut to 29 bps in interest rate cuts on fresh loans. With the system flush with liquidity, RBI hopes that banks would cut rates further. Das said at present, the slowdown seems cyclical rather than structural.
In terms of pushing up demand and increasing credit flow, reduction of risk weights on consumer credit and allowing banks to lend to priority sector through NBFC on-lending are significant. “Permitting banks to on-lend through NBFCs for priority sector lending would make this transmission faster and more efficient. This also would significantly improve the MSME functioning in the current environment,” said Umesh Revankar, MD &CEO, Shriram Transport Finance.
Reduction in risk weight would reduce banks’ capital requirements by Rs 125 billion and add 14 bps to their capital ratios, estimated Karthik Srinivasan, Senior VP, ICRA. The 5 per cent rise in single counterparty exposure will allow banks to undertake additional exposure of Rs 500 billion, and an overall exposure of Rs 2 trillion to a single NBFC, he said. Since that kind of a large single NBFC exposure may exist, some banks that may be breaching single NBFC exposure limit might be able to extend fresh funding, he added.
NEFT payments to be possible 24x7
The RBI’s regulatory announcement would make available National Electronic Funds Transfer (NEFT) payment system 24x7 from December 2019. Currently, NEFT system is used for fund transfer from one account to another held with any other bank that is part of the NEFT system, between 8 am to 7 pm on all working days of the week, except on second and fourth Saturdays of the month. At the last policy meet, RBI had removed charges for payments via NEFT and RTGS and asked banks to pass on the benefits to customers.
RBI expands BBPS’ biller categories
Expanding the scope of Bharat Bill Payment System (BBPS), RBI said it will allow all categories of billers except prepaid recharges. Currently, BBPS covers five segments of billers: DTH, electricity, gas, telecom and water bills. Further, the central bank has also announced “on tap” authorisation to entities wanting to operate Bharat Bill Payment Operating Unit, Trade Receivables Discounting System, and
White Label ATMs.