RBI shifts focus to growth

The statement mentioned inflation excluding food and fuel remaining high, and called the higher health and education costs to be a one-off phenomenon being watched closely.

Published: 08th February 2019 10:10 AM  |   Last Updated: 08th February 2019 10:10 AM   |  A+A-

Reserve Bank of India Governor Shaktikanta Das, along with deputy governors, arrive for the bimonthly Monetary Policy Committee review meeting at RBI headquarters in Mumbai on Thursday.

Reserve Bank of India Governor Shaktikanta Das, along with deputy governors, arrive for the bimonthly Monetary Policy Committee review meeting at RBI headquarters in Mumbai on Thursday. | PTI

By Express News Service

MUMBAI: THE sixth bimonthly monetary policy statement indicated not just a change in policy stance to ‘neutral’, but also showed a bias towards supporting growth, shifting stance from steadfastly controlling inflation. The rate cut, as well as several policy measures such as improving credit flow to NBFCs and hiking the limit of agricultural loans without collateral, point towards the shift from “price stability” to “growth”.

Revising its GDP target for FY20 a tad lower to 7.4 per cent from 7.5 per cent projected in the last policy, RBI flagged growth concerns on slowdown in consumption expenditure, muted credit flows to industry, subdued services sector, lower Rabi sowing, weakening rural demand and slowdown in motor cycle, tractor sales.

“Investment activity is recovering but supported mainly by public spending on infrastructure. The need is to strengthen private investment activity and buttress private consumption,” RBI said.“Growth back in the RBI’s vocabulary, not as a risk to price stability but as a legitimate target. Fiscal concerns and the inflationary consequences seem to be underplayed,” said Abheek Barua, chief economist, HDFC Bank.

RBI governor Shaktikanta Das said the central bank has assessed the impact of various budget proposals and revised fiscal deficit target for the current fiscal and next, while arriving at the revised inflation numbers. The statement also mentioned inflation excluding food and fuel remaining high, and called the higher health and education costs to be a one-off phenomenon being watched closely.

This also perhaps brings a convergence between the government desperate for growth, and the RBI that has so far been steadfast on inflation control, hinting at growth focus.

Another area of focus for the government has been the state of liquidity and fund flow to NBFC sector. Now that the liquidity in the system is seen to be in surplus, NBFCs got a little more leeway in accessing credit from banks, with RBI decision to let better rated NBFCs except for core investment companies get risk-weighted as per the ratings assigned.

“The rate cut comes as a much needed shot in the arm for NFBCs… the proposal to reduce risk weights on bank exposure to better-rated NBFCs will help reduce their cost of funds further. We believe it has brightened the outlook for India’s NBFC sector,” said V P Nandakumar, MD & CEO, Manappuram Finance.

Push for Agri loans

Recognising a slowdown in the farm sector, the RBI has suggested an increase in the collateral free agricultural loan limit from the current I1 lakh to I1.6 lakh, and also setting up of a working group to review agricultural credit. The increase in limit is a reflection of inflation since the target of I1 lakh was fixed in 2010 to increase small and marginal farmers’ coverage in the formal credit system.

Bulk depositS BASE

To help banks raise more funds and also to offer operational flexibility on bulk deposits, RBI raised the criteria for bulk deposits from single rupee deposit of I1 crore at present to I2 crore. Banks offer slightly higher deposit rates on bulk deposit rates than regular fixed deposit rates for smaller deposits. RBI has asked banks to “maintain their bulk deposit interest rate cards in the core banking system for supervisory review”.

UCBs’ Umbrella body

After nudging co-op banks to move towards becoming small finance banks by setting up management boards, the RBI policy has proposed an umbrella organisation for Urban Co-operative Banks as a long-term solution to make them “financially resilient and to enhance the depositors’ confidence”. The UO, apart from extending capital support to member UCBs, would also set up IT infrastructure for shared use.

ECB norms relaxed

To help distressed firms under the Corporate Insolvency and Resolution Process under the Insolvency and Bankruptcy Code (IBC) find funds to repay domestic debt, RBI has relaxed the External Commercial Borrowing (ECB) guidelines. Firms so far were not allowed to use funds raised through ECB for rupee loan repayments. RBI has not relaxed the end-use restrictions for the firms under resolution process.

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