Here's why Indian markets aren't excited by the RBI move to cut interest rates

Reserve Bank of India (RBI) Governor Shaktikanta Das during RBI's bi-monthly policy review, in Mumbai.Photo/Mitesh Bhuvad) (
  • RBI has cut its lending rates by 35 basis points or 0.35%, making this the fourth consecutive cut in 2019.
  • Governor Shaktikanta Das has signalled that the regulator is keen on reviving economic growth.
  • Sensex and Nifty were changed little after the decision as the decision was largely on expected lines.
The good news is that the Reserve Bank of India (RBI) has cut interest rates for the fourth time this year with a clear signal that it wants credit and economic growth to spike up again, thanks to inflation being less of a risk than it was earlier.

Typically, share markets cheer interest rate cuts because it leads to lower lending rates for businesses and more cash in the system. However, the markets were nonchalant this time around because the RBI move was on expected lines and the rate cut was already priced in.

There are other concerns too. "On the domestic front, the south-west monsoon gained intensity and spread with the cumulative rainfall 6 per cent below the long-period average (LPA) up to August 6, 2019," the RBI monetary policy review said. Deficient monsoon can be debilitating for the Indian economy, where more than half population depends on agriculture and much of the farm land is dependent on rains.

Dampening the mood was the tardiness in the economy. For the current fiscal year ending March 2020, RBI has cut its forecast to 6.9% from 7% estimated earlier.

However, the consensus among economists and market participants is that the dent in growth may be much bigger than what the central bank has estimated. India’s GDP growth slipped to 5.8% at the end of the March quarter, the slowest quarter in five years.


Reflecting the sluggishness in the economy, the RBI cut the inflation target for the next one year to 3.6%, less than the 4% that is the central bank's target.

Damage control

A big decision was to make space for cash flow into the non-banking financial companies, firms that lend money but do not take deposits. Banks have allowed to lend 20% of their tier-1 capital to these firms, compared to 15% until now.

Home loans below ₹20 lakh will be considered as priority sector loans, and these can be routed throw NBFCs too. Simply put, if an NBFC borrows money from a bank and then lends it further to a home buyer within the ₹20 lakh threshold, it will be considered as a 'priority sector' loan.

A set portion of all loans by banks must be made to certain sections of the economy, at a cheaper rate, because they need the affordable loans more than others. These are called 'priority sector' loans.

Banks, caught between a cash crunch and a mountain of bad loans, have not reduced lending rates despite many nudges and winks from the regulator as well as prodding from the Finance Minister Nirmala Sitharaman. “The transmission of rate policy action has been less than satisfactory and the RBI may work on nudging banks to do so instead of lowering the rate once again,” said CARE.

Non-banking financial companies or NBFCs, companies that aren’t banks but make loans, are facing liquidity crunch and the crisis is deepening. They, in turn, have stopped lending which has further slowed down the economy particularly in spaces like automobiles and real estate.

Monthly auto sales, for instance, fell for the ninth straight month in July.

RBI is hoping that lending rates will fall sharply, people particularly business owners will borrow more, and the growth engine will start revving up again. Markets want to see the evidence of that.

SEE ALSO:
RBI cut interest rates by 35 basis points as growth sputters and inflation cools




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