'Don't discount the RBI' ⁠— that and other top highlights of RBI governor Shaktikanta Das speech

Reserve Bank of India (RBI) Governor Shaktikanta Das along with his deputies arrives for the RBI's bi-monthly monetary policy review meeting, in Mumbai.Photo/Mitesh Bhuvad)(
  • While assuring markets of steps to boost India's economic growth, Governor said that the RBI has tools other than interest rates.
  • India's central bank left interest rates unchanged, as expected, despite softening inflation.
  • The latest credit policy review also allowed housing finance companies to be a bit more lenient with real estate firms, some of whom will remain solvent for a bit longer due to this step.
India's central bank chief Shaktikanta Das assured markets that the regulator will take step to boost India's economic growth. "Don't discount the RBI," he said adding that the Reserve Bank of India has tools other than interest rates to lift the country's economy. The steps announced today will inject ₹1 lakh crore into India's financial system.

India's central bank left interest rates unchanged and kept its stance as 'accommodative', as expected, despite softening inflation. This was a unanimous decision by all members of the monetary policy committee.

However, the latest credit policy review also allowed housing finance companies to be a bit more lenient with real estate firms, some of whom will remain solvent for a bit longer due to this step. This led to a sharp spike in home loan providers like HDFC as well as real estate developers like Brigade Enterprises policand DLF.

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These are the other highlights of Governor Shaktikanta Das' speech post the credit policy review by the Monetary Policy Committee:

Inflation outlook for essential items

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1. Onion prices are expected to ebb due to improving supply but the monetary policy panel concurred that inflation has gone past the upper end of RBI's tolerance level. There is policy space available for 'future action' but it has to suitably timed. According to RBI projections, headline consumer inflation has peaked, it will start slowing down hereon.

2. Bumper rabi production will support rural incomes. Inflation will ease in the second half of the year. Onions and other vegetable prices have led to the recent rise in inflation. Potato prices have eased, cereal prices will also fall if steps are taken to reduce stock levels. Prices of pulses will remain range-bound. However, the rise in mobile tariffs and medicines may push inflation higher.

Outlook for economy and lending rates

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3. The estimate for FY20 GDP growth is 5% and it may improve to 6.2% in the three months between October and December 2020. There is some evidence that the savings from corporate tax cut are being ploughed back into creating new assets as opposed to financial savings. Full effect of coronovirus not clear yet.

4. Transmission of rate cuts by RBI has been sizeable across banks as well as bond markets. Weighted average lending rate for retail loans has fallen 69 basis points compared to 41 basis points two months ago. The leeway on cash reserve ratio on consumer loans is available till July 31.

5. The long-term repo announced by RBI today will allow banks to borrow money from RBI at a much lower rate of 5.15% for a period of a year or three years. This will bring down the cost of funds for banks, helping in bringing interest rates down, and increase lending.

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6. Date of commencement of commercial operations of project loans for commercial real estate, delayed for reasons beyond the control of promoters, allowed to be extended by one year.

Governor explains the logic behind 'Operation Twist'

5. Corporate bonds are benchmarked to the lending rates in the government securities segment. If you are able to bring down the yields on 10-year government bonds, it would bring down the borrowing rates in the corporate bond market.

Steps taken to boost specific sectors

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6. Banks can deduct the amount of money given as new home loans, auto loans, and business loans to small and medium enterprises, before calculating the cash reserve ratio (currently at 4%). This will essentially incentivise banks to lend more to retail borrowers buying homes, cars, as well as small businesses.

7. Loan restructuring programme for micro, small and medium enterprises by a year. This will be applicable for GST-registered firms that had defaulted on loans but were classified as 'standard' on January 1.

8. RBI will develop a new index to track and monitor the level of digitisation in payments and settlements. This will be called the 'Digital Payments Index' (DPI) and it will be published from July 2020.

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Framework for a Self-Regulatory Organisation (SRO) for digital payments sector will be issued.


SEE ALSO:
India’s central bank keeps interest rates unchanged - provides relief to real estate sector

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