RBI moves unlikely to ease pain for India's struggling shadow banks

Jeannie Matthews
August 8, 2019

The six-member monetary policy committee (MPC) cut the repo rate by an unconventional 35 basis points to 5.40%, just above a 25 basis point cut predicted by 80% of the 66 analysts polled by Reuters last month.

Asked about the unconventional rate cut size at a press briefing, RBI Governor Shaktikanta Das defended the move, saying the MPC viewed a standard 25 bps cut as being "inadequate in view of the evolving global and domestic macro-economic" conditions, while a 50 bps cut was seen as potentially "excessive", given past RBI actions.

The "repo rate" is the term given to the rate at which the RBI lends money to commercial banks in case of shortfall of funds.

"The impact of monetary policy easing is expected to help economic activity going forward", he said.

The repo rate under the liquidity adjustment facility (LAF) has been reduced by 0.35 basis points to 5.40 percent from 5.75 percent with immediate effect.

The MPC also cut the reverse repo rate to 5.15%.

Das added that that MPC found 35 basis points as sufficient for the time period.

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Hours after the Reserve Bank of India (RBI) cut the benchmark lending rates, India's largest lender State Bank of India (SBI) announced reduction in its home loan interest rates across all tenors.

Accommodative stance retained: The MPC also chose to maintain the accommodative stance of monetary policy. The RBI itself has reduced its growth estimate downwards to 6.9 percent for FY20 from 7 percent it had projected in the June policy.

Inflation outlook: The committee projected the CPI inflation at 3.1 per cent for the second quarter of the financial year 2019-20 (FY20) and 3.5-3.7 per cent for the second half of the fiscal year (H22019-20), with risks evenly balanced.

Global economy slows down: The MPC noted that global economic activity has slowed since the meeting of the MPC in June 2019, amidst elevated trade tensions and geo-political uncertainty.

The RBI would also allow bank lending to registered NBFCs (other than micro-finance institutions) for on-lending to agriculture (investment credit) up to Rs 10 lakh, micro and small enterprises up to Rs 20 lakh and housing up to Rs 20 lakh per borrower (up from Rs 10 lakh at present), and they would be classified as priority sector lending.

In an August 2 report, Edelweiss Securities pointed out that the "entire responsibility" of reviving the Indian economy now "rests on the RBI's shoulders".

It further said that the emerging markets stocks lagged behind their developed market counterparts, mainly reflecting the weak performance of Chinese and South Korean stocks.

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