The RBI (Reserve Bank of India) has recently changed its monetary policy stand to neutral as compared to calibrated tightening previously. As a result, there may be several more rate cuts in the offing as per banking industry experts. With the RBI slashing the repo rate to the tune of 25 basis points at its 6th bi-monthly monetary policy review recently, expectations have grown for several other cuts in rates in the near future. The repo rate now stands at 6.25% and the policy stance has also been transformed to neutral. This may indicate a soft approach towards rates in case inflation remains at lower levels which have been forecasted.
As a result, several experts feel that rates may be softening further down the line in the near future and headline inflation figures may actually go below the inflation mandate of the RBI and expectations of inflation levels are actually lower than before. The headline inflation prediction for the next year has been reduced by the RBI with expectations of 2.8% for the March quarter followed by 3.2-3.4% overall for H1 of the next financial year and 3.9% in the third quarter of the financial year 2020. The retail price index was seen at 2.2% in December 2018 which indicated a low point over 18 months.
In the near future, the neutral stance will ensure higher flexibility with regard to working in sync with flow of information. As a result, in case food prices have sharp fluctuations or there is a sudden increase in inflation levels, another rate cut may be possible in the near future at least as per several banking experts. The policy in April 2019 may also ease out a little due to the reduction of the inflation forecast as per another section of forecast. Some other experts have stated that there is a desire to back growth in case the inflation objectives are accomplished with the monetary policy committee taking note of the economic slack.
Some experts feel that the banking sector will benefit positively from the first monetary policy released by the new RBI Governor Shaktikanta Das. The RBI has been ensuring more liquidity via sustained OMOs and with the latest cut in repo rates, borrowing rates may be moderated a little as well. The overall aim of the RBI seems to drive growth and also for driving away any anxieties of deficit in liquidity away from the market as per reports. The rate cut will also help in enabling more flow of credit while enhancing consumption.
The RBI has also come out with several new announcements in its policy which can lead to new avenues opening up for financial markets. There has been the decision towards rationalization of the risk weights with regard to on-lending for NBFCs which have top ratings. This will lead to superior price discovery, improved flow of credit from banks and lower requirements of capital according to some market experts. Top rated and financially strong NBFCs can now raise higher funds at more competitive prices according to them. The RBI has also increased the limit for agriculture loan (collateral free) to Rs. 1.60 lakh from Rs. 1 lakh previously. This will help in boosting coverage of the marginal and smaller farmers in the banking setup and will also boost overall agricultural growth. With banks getting more flexibility in terms of bulk deposits, they will be better equipped with regard to management of any mismatches in terms of asset liabilities. Turnarounds may also be faster with the opening up of ECB routes for applicants under the IBC umbrella.
With the repo rate at 6.25%, the marginal standing facility or MSF and reverse repo rates are now at 6% as per reports. The CPI inflation prediction has been noted above and is lower as compared to 2.7-3.2% for H2 FY19 and 3.8-4.25 for H1 FY20. The Consumer Price Index Inflation forecast has also been released for the third quarter of FY20 at 3.9%. The risk balance, according to the RBI, should be neutral now as compared to the policy review in December last year when risks to the forecasts were estimated to be on the higher side. The MPC has also noted risks arising from the global demand slowdown and tensions linked to global trade.
However, the GDP growth has been forecasted at a decent 7.4% for the 2020 fiscal year with risks being balanced more evenly. This is higher as compared to earlier estimates of 7.2% in FY19. The inflation estimates will now play a vital role and in case they remain on track, there will be more space for rate cuts in the future and this will naturally mean good news for home loan customers and other loans. The monetary policy actions will now be geared towards backing more growth in the present scenario as per experts.
Piyush Goyal, the Union Finance Minister, has reportedly encouraged this cut in interest rates and has stated that the decision to lower repo rates and the changing of the stance to neutral will enable a major economic boost while enabling more affordable funds for homebuyers and small businesses. This may even lead to better employment opportunities according to the Union Minister as per reports. The overseas borrowing regulations have been eased out by the RBI for stressed asset bidders under the IBC (Insolvency and Bankruptcy Code). The applicants for resolution under the Corporate Insolvency Resolution procedure can tap into ECB (External Commercial Borrowing) proceeds in case of rupee loans of insolvent companies which they wish to purchase. The bulk deposit threshold for banks has been increased to 2 crore from 1 crore and 1 lakh crore of bulk deposits will now be categorized as retail deposits. These are measures that will help in improved price discovery as per several experts. 75% of eligible farmers will also get more benefits minus any collateral due to the raising of the loan limit as stated earlier.