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Saturday 6 April 2019



With the backdrop of slowing global growth, hazy oil prices, uncertain monsoon and domestic economy not giving strong growth impulses, a cut was expected. Repo rate was cut 25 basis points to 6% in the first bi-monthly monetary policy signally slowing domestic growth overshadowed by global concerns. RBI maintained its neutral stance and as a result, repercussions were flattish for the equity markets which had already pencilled in the 25-basis cut but expected the central bank to turn over to accommodative mode. The bond markets perceived the policy to be less dovish and thus reacted with a 6-basis point rise for the benchmark 10-year bond to 7.34%.  

Reserve Bank Of India has been impacted by the recent democratization of the Indian Financial System. Kotak Mahindra’s petition followed by judgement against RBI’s February 12 circular has underlined the need of wider consultations with relevant stakeholders before important policy formulations. Though Kotak Mahindra case in still in suspension mode, RBI has agreed to issue fresh circular with respect to resolution of NPA mess.  Fringed and flanked by such complex operative derivatives, RBI has done its bit in the first bimonthly monetary policy by pushing for growth as retail inflation at 2.6% and its revised GDP estimate of 7.2% called for a repo rate cut. Coming to liquidity issues faced by the market, apart from regular OMOs and the recent innovative rupee dollar swap tool, the central bank has allowed an additional 2% of SLR to be counted as Level 1 High Quality Liquid Assets for LCR computation for banks. This will not only harmonise liquidity requirements of banks with LCR, but also release additional liquidity for banks for lending purposes. Decision to link retail loan floating rates to external benchmark and the activation of Countercyclical Capital Buffer have been deferred. One of the major RBI announcements was with respect to corporate loan secondary market. Reserve Bank will set up a Task Force to recommend measures for developing robust secondary market for corporate loans in India.

With general elections just round the corner and effectiveness of Repo Rate arsenal already in question with lower rate cuts transmitted to general public, the central bank is worried  about growth as credit flows remain muted for small, micro and medium enterprises, capacity utilization is low with weak export growth and declining non gold non-oil imports. Though growth might improve with new government formation in June and annual budget in July, another 25-basis rate cut is already on the MPC table.