Sixth bi-monthly Monetary Policy Statement 2018-19: RBI slashes rates by 25 bps

As a key policy shift, the Reserve Bank of India (RBI) today reduced the repo rate by 25 basis points to 6.25%, the first rate cut since August 2017. The reverse repo rate under the Liquidity Adjustment Facility (LAF) has also been adjusted to 6.0% from 6.25%. Also, the Monetary Policy Committee (MPC) has decided to change the monetary policy stance from calibrated tightening to neutral. The central bank indicated that the decisions were taken considering the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4%, within a band of +/- 2%. Consumer price inflation has also remained within control and dropped to a 18 month low of 2.2% in December 2018.

The underlying considerations for the recent rate cut has been inflation remaining in control and the slowdown in global economic activity. The rate cut is expected to assist banks in addressing liquidity issues and at the same time, lower cost of funds is expected to spur consumption. The reduction in cost of funds will assist lending, thereby spelling positive news for banks and NBFCs.

Some of the other key decisions that were taken at the meeting included the Central Bank removing the 100% risk weights for NBFCs.

Some of the other key decisions that were taken at the meeting included the Central Bank removing the 100% risk weights for NBFCs. NBFC’s risk weights will now be as per their rating, which is a positive development for higher-rated NBFCs. Also, various categories of NBFCs have evolved over time pertaining to specific sector/asset classes - at present there are twelve such categories. However, it has now been decided to harmonise major categories of NBFCs engaged in credit intermediation, viz., Asset Finance Companies, Loan Companies, and Investment Companies, into a single category. The proposed merger of existing categories would reduce, to a large extent the complexities arising from multiple categories and also provide NBFCs greater flexibility in their operations.

Also, the central bank also announced the removal of Foreign Portfolio Investors (FPI) restrictions in corporate debt. As a part of the review of the FPI investment in Corporate Debt undertaken in April 2018, it was stipulated that no FPI shall have an exposure of more than 20% of its corporate bond portfolio to a single corporate (including exposure to entities related to the corporate). While the provision was aimed at incentivizing FPIs to maintain a portfolio of assets, however it was seeming that FPIs have been constrained by this stipulation. Hence, the RBI announced today that the provision stands withdrawn.

In view of the above developments and the repo rate cut, the decisions undertaken at the meeting are positive and are likely to spur private investments and consumption in the country.

In view of the above developments and the repo rate cut, the decisions undertaken at the meeting are positive and are likely to spur private investments and consumption in the country. Considering the constricted liquidity position of banks and the rising home loan interest rates over the past one year, the rate cut is expected to act as a stimulus if banks pass on the benefits of this rate cut to end users. Also, the initiatives undertaken for NBFC’s are likely to provide an easier operating environment for such corporations. At the same time removal of restrictions on FPI will encourage a wider spectrum of investors to access the Indian corporate debt market.