Story Of The Week

From Neutral to Accommodative – MPC’s 3rd Consecutive Rate Cut

On June 6, Reserve Bank of India expectedly cut repo rate by 25 bps and changed its policy stance from neutral to accommodative citing concerns for growth.

India’s GDP growth rate fell to a 20-quarter low of 5.8 percent in the January to March 2019 quarter, as per government data released on May 31. Consumption growth fell to 7.2 percent year on year, while investment growth slipped to 3.8 percent. The domestic concerns, ranging from weakness in rural demand and reduced flow of finance from non-bank lenders were already there but the global growth concerns also deepened in recent weeks. On the back of these concerns, the Monetary Policy Committee has reduced its FY20 growth forecast to 7 percent from the 7.2 percent earlier.

“Data for Q4 2018-19 indicate that domestic investment activity has weakened and overall demand has been weighed down partly by slowing exports. Weak global demand due to the escalation in trade wars may further impact India’s exports and investment activity. Further, private consumption, especially in rural areas, has weakened in recent months”, said the MPC.


The six-member committee monetary policy committee (MPC) headed by Shaktikanta Das decided to reduce key repo rate by 25 basis points to 5.75 percent from 6.0 percent with immediate effect. The reverse repo rate under the LAF (liquidity adjustment facility) has been adjusted to 5.50 percent, and the marginal standing facility (MSF) rate and the bank rate to 6.0 percent. The RBI had retained its “neutral” stance after the rate cut in April but now it has changed its stance to “accommodative”. This will be more comforting for the market than just a rate cut, especially in light of the slowdown.

Repo rate is the rate at which the RBI lends money to banks. When the cost of borrowing goes down, the banks are able to lower their respective marginal cost of funds based lending rate (MCLR), which directly impacts loans. “These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 percent within a band of +/-2 percent while supporting growth,” RBI said in a statement. There was speculation that a bigger 35 bps or even 50 bps rate cut might be announced. The last time the MPC moved this quickly to lower rates was reportedly in 2013 to reenergize the moribund economy from growth rates that had slipped to a decade low.


Source: Business Today

RBI said a sharp slowdown in investment alongside a continuing moderation in private consumption growth is a matter of concern. “The headline inflation trajectory remains below the target mandated to the Monetary Policy Committee even after taking into account the expected transmission of the past two policy rate cuts,” it said. Hence, there is scope for the Monetary Policy Committee to accommodate the concerns of growth by supporting acts to boost aggregate demand, and in particular, reenergize private investment activity, while remaining in line with its flexible inflation targeting mandate.

With this cut, the repo rate has come down to its lowest level since July 2010. All the members of the Monetary Policy Committee (MPC) unanimously voted for the rate cut by 25 basis points and the change in stance in its policy. RBI Governor Shaktikanta Das said the apex bank would take all the necessary steps to ensure adequate liquidity in the system. The central bank did not mention any special package for NBFCs barring the appointment of the working group to look at the problem of liquidity. Additionally, the RBI said that it has decided to do away with charges imposed on RTGS and NEFT transactions, banks are required to pass this benefit to their customers. The RBI has also decided to set up a committee involving all the stakeholders, under the chairmanship of CEO Indian Banks’ Association (IBA), to examine the entire gamut of ATM charges and fees.

The 10-year bond yield fell to 6.88 percent after the rate and stance change, from its pre-policy level of 6.99 percent. Key equity indices pared losses on the rate cut announcement, but the Sensex, Nifty Fifty and Nifty Bank continued to trade in the red. The rupee continued to trade at 69.32-69.34 levels to the dollar. “It’s a glass half empty, half full. Half full for the bond markets, half empty for the equity markets,” said Mihir Vora, CIO at Max Life Insurance, on the market reaction to the MPC announcement.

With the Current stance and the scenarios, the market experts are expecting further rate cuts in the coming years. The unanimous vote for a rate cut reflects the gravity of the situation in terms of the way the economy is going, said fixed-income expert Manish Wadhawan. “The change of stance gives a longer horizon for lower rates to sustain and should be definitely helpful,” he added.

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