RBI rate cut to fuel growth

Debutant Shaktikanta Das, the new RBI Governor, and the six-member Monetary Policy Committee have stumped the bankers, analysts and those who had professed status quo in the policy rates by reducing the repo rate by 25 bps to 6.25% (last reduction in August 2017).

The decision was 4:2 in favour of the rate cut while the decision of change in policy stance to ‘neutral’ from the earlier ‘calibrated tightening’ was unanimous. Chetan Ghate and Viral Acharya voted for status quo while the governor voted for reduction in the policy rate along with the other three MPC members.

The change of guard in the RBI has led to the rate cut. The U-turn of existing members from their ‘calibrated tightening’ stance to ‘neutral’ in a span of just two months, is intriguing and shows who the real boss is.

The rate cut and key changes with respect to certain policies is a continuation of announcements and programmes of the central budget and the ‘feelers’ which the new governor assimilated during the meeting of the CEOs of Public Sector Banks on January 28 along with standby finance minister Piyush Goyal.

The rationale for the surprise reduction in the repo rate is plummeting of CPI inflation (headline inflation, includes food and fuel) to an 18-month low at 2.19% in December 2018 as against 2.33% in November 2018 and 5.21% in December 2017. Inflation is very much under control, benign and even the projected inflation by the MPC will not breach the mandated 4% till 2019-20, which signals further rate cuts.

The MPC has ‘front-loaded’ the rate reduction to boost the sagging critical sectors — real estate, housing, credit off take by banks and to kick start the private CAPEX by facilitating borrowings by corporates/MSMEs from banks and NBFCs at a cheaper rate.

The Index of Industrial Production (IIP) had slowed down in November 2018. The manufacturing Purchasing Managers’ Index (PMI) in January 2019 marginally increased to 53.9 while the Services PMI fell to 52.25 in January 2019 from 53.2 in December 2018. Credit off take through banks to these sectors warranted rate cut and softening of policy tone.

The reduction in the repo rate by 25 bps will have a complimentary effect on the benefits accorded ‘to housing for individuals/real estate’ in the central budget. The PSBs will straight away pass on 10-15 bps reduction in the interest rate on housing loans, vehicle and other retail loans to push business during February and March.

These rate cuts will vary from bank to bank depending on their MCLR, which in turn is dependent on their cost of borrowings, FD rates and NPA position/bad debt provisioning.

The governor’s pragmatic decision to do away with 100% risk weightage for NBFCs/HFCs will have a tremendous impact on their cost of funds. The risk weightage to be assigned will be based on their ratings by accredited rating agencies (CARE, CRISIL, FITCH, ICRA) on key parameters.

Higher-rated NBFCs and HFCs will get funds at cheaper rates by the banks. This will lead to NBFCs and HFCs lending to corporates, MSMEs, real estate, home loan borrowers and builders, specially those who are into the affordable housing segment, at cheaper rates. This will kickstart private investment cycle and fire all the growth cylinders, leading to accelerated growth via multiplier effect.

Agriculturists have not been left far behind. The RBI has raised the collateral free agriculture loan limit to Rs 1.6 lakh from present Rs 1 lakh, which will help small and marginal farmers.

The rate cut will boost affordable housing both from the supply and demand side. Last year’s budget dedicated Rs 1,000 crore to the affordable housing fund under the National Housing Bank (NHB) with the mandate of building 3.7 million houses in urban and 5.1 million houses in rural areas, in addition to Rs 29,000 crore allocation to the Prime Minister Awas Yojana (PMAY) under the Cash Linked Subsidy Scheme (CLSS).

To give impetus to EWS, LIG, MIG 1 and 2 to get direct subsidy transfer from Rs 2.20-Rs 2.70 lakh, the income eligibility for the EWS beneficiaries was raised to Rs 3 lakh per annum, LIG to Rs 6 lakh per annum, MIG1 and 2 to Rs 12 lakh and Rs 18 lakh per annum, respectively, including carpet area relaxation from 90 sqm to 120 sqm for MIG1 and to 150 sqm from 110 sqm for MIG2.

Against a target of 37 lakh houses under the affordable housing for 2018-19, hardly 12 lakh houses have been handed over to the beneficiaries. Hardly Rs 34,000 crore has been disbursed by way of NHB refinance to HFCs and banks.

With repo cut, NHB will be able to refinance eligible HFCs and banks at a lower rate (without tenure mismatch) which in turn will push the demand for housing loans to individuals and augment supply or liquidate inventory of unsold stock by the builders. This will have an all-round positive impact.

In sum, the surprise rate cut by Shaktikanta Das who moved from North block to MINT street has brought cheer to all stakeholders — bankers, corporates, MSMEs, agriculturists, NBFCs/ HFCs — and most importan, has been applauded by the central government.

(The writer is a Bengaluru-based banker)