The First Bi-Monthly policy held on April 4, 2019, by the Monetary Policy Committee (MPC) of the Reserve Bank of India cut the repo rate under the Liquidity Adjustment Facility (LAF) by 25 basis points to 6% from 6.25% earlier. This is second in row rate cut by the RBI. Subsequently, the Reverse repo rate under LAF has been adjusted to 5.75% from 6% earlier. The marginal standing facility (MSF) rate and the Bank rate have changed to 6.25%. The RBI has allowed 2% of SLR to be considered as Level 1 High-Quality Liquid Assets (HQLA). It is with the intention of computing the Liquidity Coverage Ratio (LCR) of banks.
The MPC has decided on the above rate cuts by maintaining the monetary policy stance as ‘Neutral’. For achieving the medium-term objective of maintaining the Consumer Price Index (CPI) inflation rate inflation of 4% within the band of +/- 2% while supporting the growth. At present, the CPI for Q4FY20 is at 4.2% which is higher than the RBI’s Inflation rates estimates.
Gross Domestic Product:
Furthermore, the RBI has revised India’s real gross domestic product (GDP) growth estimates downwards for 2019-20 from 7.4% to 7.2%. The economy is estimated to grow in a range of 6.8% to 7.1% in H1:2019-20 and in H2:2019-20, the GDP is estimated in a range of 3.3% to 7.4%. The reduction in the estimates is due to the recent high-frequency indicators point towards slowing down of manufacturing growth. And also the demand for investments remains subdued. The earlier drag in the aggregate demand from net exports curbed in Q3 was due to a marginal increase in exports and explicit deceleration in imports driven by a drop in crude oil prices.
Gross Value Added:
On the Supply front, the growth in the agricultural output slowed down decelerated at 6.8% Gross Value Added (GVA) in 2018-19 as compared to 6.9% in 2017-18. The GVA industrial growth in Q3 remained stagnant where the Manufacturing GVA registered a moderate slowdown. Service GVA also remained unchanged in Q3 whereas the construction activity growth accelerated in Q3. Furthermore, there was a decline in momentum in administration, defense, public and other service sectors.
Food grain production for 2018-19 stood at 281.4 million tonnes. It was down by 1.2% as compared to the advance estimates of 2017-18. Although it was 1.4% higher than the second advance estimates of 2017-18. According to the National Oceanic and Administration (NOAA) of El Nino conditions grew during February 2019. The outlook for food and fuel inflation remains benign on a short term basis. Although early reports from domestic whether forecast company suggests the probability of El Nino effect in 2019. There are various other factors which can affect the oil prices continue to remain hazy on both upside and downside.
El Nino – “the boy child” in Spanish, is a weather phenomenon. It is defined by an unusual warming of the eastern Pacific Ocean that triggers inadequate rains and droughts in the Indian sub-continent.
Index of Industrial Production:
The manufacturing component of the Index of Industrial Production (IIP) growth declined to 1.3% in January 2019. It was due to the slowdown in the automobile, pharmaceutical, and machinery and equipment sectors. Also, the growth of 8 core industries remained sluggish in February 2019.
Credit flow in micro, small, and medium industries continued to remain muted, although it improved for large industries to a certain extent. Capacity Utilization in the manufacturing sector is operating above its long term average to 75.9% in Q3. As compared to 74.8% on Q2. The seasonally adjusted CU increased to 76.1% from 75.4 %. The manufacturing Purchasing Managers Index (PMI) continued to remain in the expansion zone that is above 50. It was maintained for the 20th month in March 2019.
The retail Inflation (measured on the basis of YoY change in CPI), after 4 months of continuous decline increased to 2.6% in February 2019. It was mainly driven by the rise in the prices of goods excluding food and fuel rates and weaker momentum of deflation in the food segment. Under the food group category, there was deflation in 4 categories i.e. vegetables, sugar, pulses and fruits in February 2019. Apart from there other categories like egg prices picked momentum and moved into inflation after 3 months of constant deflation. And other categories also moved into inflation.
CPI Inflation excluding food and fuel rates increased to 5.4% in February 2019 from a decline of 5.2% in January 2019. It was due to the broad-based pickup in inflation of personal care and effects, recreation and amusement sub-groups. Due to the reduction in the prices of petrol and diesel the inflation in clothing, footwear, transports and communication sub-group declined. Inflation in health and education subgroup was moderated markedly in January and February as compared to the December 2018; it remained elevation in this duration.
From February 1 to February 6 the daily net average surplus of Rs. 27,928 crores moved systematically in the deficit from February 7 to March 31, 2019, indicating the build-up if government cash balance. The currency circulation in the country expanded sharply during February and March 2019. The liquidity requirement was met by injecting Rs. 37,500 crore in February and Rs. 25000 crores in March 2019 via Open Market Operations (OMO).
Subsequently, durable liquidity was injected by the RBI via OMO of Rs 2, 98,500 crores for 2018-19. The liquidity injected under LAF on an average daily basis was Rs. 95,003 crores from February 7 to February 28, 2019. Under LAF further Rs. 57,043 crores were injected in March 2019. The weighted average call rate (WACR) was aligned with the monetary policy rate cuts of February and March 2019.
Further, the lower repo rate (the rate at which banks borrow from the RBI) raised hopes for the borrowers as the EMI rates can be lowered. But, due to the lower deposit growth than the credit growth for banks has led to tight liquidity conditions. Further, for banks to cut the interest rates for borrowers might be difficult. Taking into consideration of seasonal liquidity tightening at the end of March 2019 the RBI conducted 4 variable long term auction of repo rate (tenor ranging in 14-day and 56-day) in addition to the usual 14-day tenure auction. The RBI also conducted long term variable foreign exchange swap (buy/sell) of USD 5 billion for 3 years tenor on March 26, 2019. this led to injection o durable liquidity of Rs. 34,561 crores in the system.
The projected CPI inflation by the RBI in its sixth bi-monthly policy was 2.8% for Q4:2018-19. 3.2%-3.4% for H1:2019-20 and 3.9% for H2:2019-20. This projection is taken after considering all the risks. Actual CPI Inflation outcomes averaged 2.3% in January 2019 and February 2019. But CPI Inflation projection is revised to 2.4% in Q4:2018-19. 2.9%-3% in H1:2019-20 and 3.5-3.8% in H2:2019-20. with taking into consideration of all the macro-economic risk.
Key Developments and Regulatory Policies:
Committee on the Development of Housing Finance Securitization Market:
The RBI has decided to form a committee to assess the state of focusing and finance securitization market in India so as to study and implement the best international practices undertaken by the lessons learnt from the global crises.
Task force for the growth of the secondary market for corporate loans:
The RBI will set up a task force to analyze the market and include international practices and to provide ways to develop this segment. As the secondary market for corporate loans is driven by banks in non-performing assets and are constrained by inadequate information and pricing on recovery rates.
External Bench marking of New Floating Rate Loans by Banks.
The floating rate loans extended from 1st April 2019 to Micro, small and medium enterprises shall be bench marked to the external benchmark i.e. the Repo rate or any other benchmark interest rate published by the Financial Benchmark India Private Ltd. (FBIL).
The RBI after discussing with the stakeholders and taking into account the feedback on the issues:
(i) Management of interest rate risk by banks from fixed interest rate linked liabilities against floating interest rate linked assets and the related difficulties, and
(ii) The lead time required for IT system up-gradation, it has been decided to hold further consultations with stakeholders and work out an effective mechanism for transmission of rates.
Meanwhile, RBI has taken several measures to enable better management of interest rate risk by banks, for instance, by allowing non-residents to participate in the Rupee interest rate swap market.
Sixth bi-monthly policy:
RBI in the previous policy meeting in February 2019 was the first Monetary Policy Committee (MPC) meeting under the RBI governor Shaktikantha Das. The RBI had lowered the Repo rate from 6.5% to 6.25%. Further, they had changed their monetary policy stance from calibrated tightening to Neutral.