Prime Minister Narendra Modi is now focusing on issues such as pushing up economic and to push growth rate to 8% as forecast by the Finance Minister Ms Nirmala Sitharaman in her maiden budget speech in parliament.
But all official agencies including CSO and RBI have lowered it to less than 7% for FY 2019-20.
Even as other economic measures are being implemented as announced in the budget, the important decision was to push up money supply. No better way than to reduce the repo rate - the rate at which the federal bank lends to psu commercial banks - and this is the 4th time it has been reduced, this time by 35 basis points (BPS). RBI has thrown the gauntlet and it's left for the PSU banks to pick it up.
Such repo cuts normally impact lending rates .It is left to PSU banks to cut their lending rates to customers. The RBI cut repo rate by 35 bps, even as it revised GDP growth to lower figures.The federal bank cut repo rate for 4thtime this year as a near stable inflation rate provided the central bank enough elbow room to help an economy, growing at its slowest in nearly five years. The RBI's monetary policy committee, led by governor Shaktikanta Das, lowered repo rate by 35% basis points to 5.4%. "There is nothing sacrosanct about 25 basis points or its multiples thereof," RBI governor Shaktikanta Das said during the post-policy press conference as most investors expected a massive 50 bps cut. (One basis point is one-hundredth of a percentage point.)
The governor said a 50 basis point cut would have been excessive in the current circumstances, but said the RBI has been pre-emptive with their stance and interest rates. The six member Monetary Policy Committee (MPC), headed by Das,was however worried , about the broader economy's growth prospects, dictated by sluggish consumption and investment activity, reports indicate .The RBI now expects India's real or inflation-adjusted gross domestic product (GDP) to grow at 6.9 per cent in 2019-20, lower than 7 per cent it had projected in June.
The RBI's monetary policy statement had itself admitted: "Various high frequency indicators suggest weakening of both domestic and external demand conditions. The Business Expectations Index of the Reserve Bank's industrial outlook survey shows muted expansion in demand conditions in Q2 (July-September), although a decline in input costs augurs well for growth."
It was during the global financial crisis in 2007-08 that RBI made so many back-to-back cuts when most major central banks were governed by a high growth agenda. A slew of high-frequency indicators - including sliding car sales - suggest the economy is yet to recover from a dismal performance in the first three months of this year, when GDP growth slumped to a five-year low of 5.8%, the agency said adding running at 3.18% in June, India's retail inflation remained below the central bank's medium-term target of 4% for almost a year. Monsoon, after a poor start, has also picked up. Last month, the US Federal Reserve cut interest rate for the first time since global financial crisis. This allows RBI room to retain easing bias, financial analysts maintain.
Rate cuts alone cannot help India's economy, unless the benefits are passed on to consumers and corporate borrowers. Banks, saddled with bad debt, have been slow to reduce lending rates despite RBI's prodding. But India's largest commercial PSU bank the State Bank of India (SBI) cut home loan rates soon after the RBI's repo rate cut pronouncement. The realty sector has been in a limbo since the time of demonetisation and GST introduction.This was the 4th time that SBI cut its lending rate this year.
Other banks, some of which are saddled with huge debt due to non-recovery of loans from big borrowers (classified as non-performing assets NPAs), are also likely to review their lending rates soon. SBI announced a reduction in its MCLR or marginal cost of fund based lending rate, by 15 basis points across the board. The revised rates are effective from August 10 this year. After the latest cut, SBI said home loans rates are now cheaper by 35 bps since April 10, 2019.The one-year MCLR comes down to 8.25% per annum, from 8.40% annum.
According to media reports,effective July 1 this year, SBI offered a repo rate-linked home loan product, interest on it getting revised automatically whenever there is a change in repo rate.SBI had revised fixed deposit rates on August 1, cutting interest rates on FDs by 20 to 75 basis points.
Since May 1, SBI linked interest rate on large saving account deposits (above ?1 lakh) to repo rate. SBI's large savings accounts now offer an interest rate 275 bps lower than RBI's repo rate. This means effectively interest rate on large SBI savings accounts will automatically fall to 2.65%. SBI savings accounts with deposits below ?1 lakh will continue to fetch 3.5% interest rate.
With the latest cut in RBI's repo rate, SBI's effective Repo Linked Lending Rate (RLLR) for cash credit/overdraft customers will stand revised to 7.65%.With inflation decisively tamed for the next 12 months, the RBI appears to have indicated a change in its focus to aid investment revival."Even as past rate cuts are being gradually transmitted to the real economy, the benign inflation outlook provides headroom for policy action to close the negative output gap. Addressing growth concerns by boosting aggregate demand, especially private investment, assumes the highest priority at this juncture while remaining consistent with the inflation mandate," the RBI statement said.
Automobile showrooms have not been reporting brisk activity, implying lower spending ability and flat income growth. Tractor and motorcycle sales - indicators of rural demand - continued to contract. Passenger vehicle sales contracted for the eighth consecutive month in June, although domestic air passenger traffic growth turned positive in June after falling for three consecutive months, reports in economic press indicate.
Commercial vehicle sales slowed down even after adjusting for base effects, mirroring how stocks aren't moving rapidly across the country to fill shop shelves beaten by low demand. Construction activity indicators slackened, with contraction in cement production and slower growth in finished steel consumption in June. Import of capital goods - a key indicator of investment activity- contracted in June, a foreign agency reported.
"Since the last policy (in June), domestic economic activity continues to be weak, with the global slowdown and escalating trade tensions posing downside risks. Private consumption, the mainstay of aggregate demand, and investment activity remain sluggish," the RBI statement said.The MPC expects the inflation genie to remain firmly bottled up, and well within the central bank's comfortable4per cent range.
Retail or consumer price index (CPI)-based inflation, the main price gauge that the central bank tracks for interest rate decisions, is projected at 3.1 per cent during July-September 2019 and at 3.5-3.7 per cent during October-March 2019-20. CPI inflation for April-June 2020 is projected at 3.6 per cent. The MPC, however, sounded a few caveats, including a possible rise in food inflation, particularly vegetables and pulses. "Uneven spatial and temporal distribution of monsoon could exert some upward pressure on food items, though this risk is likely to be mitigated by the recent catch up in rainfall," the MPC is quoted by the media as saying.
Also, despite excess supply conditions, crude oil prices may likely remain volatile due to geo-political tensions in the Middle-East. The RBI's outlook for CPI inflation excluding food and fuel also remains soft.Four members (Ravindra H. Dholakia, Michael Debabrata Patra, Bibhu Prasad Kanungo and Shaktikanta Das) voted to reduce the policy repo rate by 35 basis points, while two members (Chetan Ghate and Pami Dua) voted to reduce the policy repo rate by 25 basis points. Uncertaintyrules market expectations on the quantum of rate changes that may come hereafter. "The overall tone of the monetary policy was dovish with slowing growth - both on the global and domestic front - being a major concern. 'Cyclical slowdown in growth' as RBI governor mentioned - has been the primary driving factor for rate cuts as seen in the past few MPC decision."
Commenting on the monetary policy statement announced by RBI , Sandip Somany, President, FICCI said, "This is an extremely encouraging move and clearly highlights the intent of the central bank to impart greater momentum to India's growth trajectory. The 35 basis points cut in the repo rate marks a deviation from the usual quarter percentage point change that is seen whenever the policy rate is moved. With today's cut, RBI has lowered the policy rate by 110 basis points in the current calendar year. The central bank has also kept liquidity in the surplus mode, and it is now critical for banks to move fast and transmit this ease in policy rate in the form of lower lending rates. Unless the transmission is swift and full, we may not see a change in the consumption and investment trajectory," Somanysaid.
Published On : 12-08-2019
Source : Kashmir Times
