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Last Updated : Feb 06, 2020 06:27 PM IST | Source: felixcossolo.com

RBI policy review: Status quo; but takes many steps to lower rates for borrowers

One more policy rate cut may be expected, as and when inflation eases, may be in the Oct-Dec quarter of 2020

Joydeep Sen

There wasn’t too much expected from RBI’s review of the monetary policy this time around. Usually, the policy review is awaited when there is an expectation of a rate cut, as people would be able to take home loans or personal loans at cheaper rates. In the current context, inflation being high – the Consumer Price Inflation reading was 7.35 per cent at last count – meant that nobody was expecting a rate cut. 

Linking RBI’s moves and loan rates

However, we attach a one-to-one correspondence between RBI’s repo rate and bank loan rates. While it is a correct approach in a way given that the interest on floating rate loans would move along with RBI’s repo rate hikes or cuts, and fixed rate loans would move mostly with the RBI’s repo rate, there is another aspect. This aspect is more relevant for fixed-rate loans, and this is about demand and availability of funds. The RBI sends signals through the repo rate; e.g., a rate cut is a signal to reduce lending rates and vice versa. But if a bank is short of funds, it may not be able to cut lending rates even after a RBI repo rate cut. From this perspective, things are much better now. The RBI has infused liquidity into the banking system, and along with the surplus liquidity available, banks are in a much better position to ease rates.

Close

In today’s policy review, even without a specific rate cut, the RBI has announced quite a few measures that will help easier transmission of rates. Let’s get a perspective first.

From February 2019 till October 2019, the RBI has eased the signal repo rate by 135 basis points i.e. 1.35 per cent. As against this reduction, till December 5, 2019, banks had reduced the one-year median marginal cost of funds-based lending rate (MCLR) by only 49 basis points (bps), which has improved to 55 bps now. The weighted average lending rate (WALR) on fresh rupee loans sanctioned by banks declined by 44 basis points only, while the WALR on outstanding rupee loans actually increased by 2 basis points, till December 2019. Till now, this has improved somewhat: WALR on fresh loans declined by 69 bps from 44 bps earlier and WALR on outstanding loans declined by 13 bps, as against an increase of 2 bps earlier.

365体育官网The inability of lending institutions in passing on RBI’s rate signal gives scope for reduction in lending rates. That is, lending rates are not only about today’s rate pause, but transmission to the real economy.

Relaxation in maintaining cash reserves

The Statement on Developmental and Regulatory Policies (DRP), released along with the policy review, says “it has now been decided that scheduled commercial banks will be allowed to deduct the equivalent of incremental credit disbursed by them as retail loans for automobiles, residential housing and loans to micro, small and medium enterprises (MSMEs), over and above the outstanding level of credit to these segments as at the end of the fortnight ended January 31, 2020 from their net demand and time liabilities (NDTL) for maintenance of cash reserve ratio (CRR).” Thus, the RBI has given exemption from the maintenance of CRR on incremental retail loans given to auto, housing, MSME etc. Further, “it has been decided to link pricing of loans by scheduled commercial banks for the medium enterprises also to an external benchmark effective April 1, 2020,” the statement adds. That is, the benefit of floating rate loans given to retail/micro/small customers, which started in October 2019, is being extended to medium size enterprises as well.

The DRP says “It has been decided to permit extension of date of commencement of commercial operations (DCCO) of project loans for commercial real estate, delayed for reasons beyond the control of promoters, by another one year without downgrading the asset classification, in line with treatment accorded to other project loans for non-infrastructure sector.” That is, for certain real estate projects, a leeway of another year and an incentive to bounce back have been given.

Moreover, from the banking system liquidity point of view, which we mentioned earlier, as an enabler for banks to pass on the signal for lowering rates, there is a measure announced. The statement says “it has been decided that from the fortnight beginning February 15, 2020, the Reserve Bank shall conduct term repos of one-year and three-year tenors of appropriate sizes for up to a total amount of Rs 1,00,000 crore at the policy repo rate.” The fact that the RBI is offering one-year and three-year liquidity at the overnight rate means it is supportive of liquidity and lower interest rates.

The bond market has taken it positively and yields have eased by five to 10 basis points across the yield curve. However, for investors in bonds or bond funds, there is no specific action point from today’s event. While the RBI is supportive, there are concerns on fiscal deficit, extra-budgetary borrowing, etc. Some action in the market will happen every other day; the investor has to go by his/her investment objectives. Directionally, bonds and bond funds remain stable as the current high inflation is transient and is expected to ease in the future, supported by buoyant rabi crops – rabi sowing has been higher by 9.5 per cent up to January 31, 2020 compared with the levels a year ago. In today’s review, the RBI has projected inflation at 3.2 per cent in Q3 of FY21, i.e., in Oct-Dec 2020.

365体育官网To conclude, the Monetary Policy Committee of the RBI states “there is policy space available for future action.” Reading this along with the maintenance of accommodative policy stance implies that one more policy rate cut may be expected, as and when inflation eases, may be in the Oct-Dec quarter of 2020.

(The writer is founder, wiseinvestor.in)

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First Published on Feb 6, 2020 05:18 pm
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