Bankers have rejoiced as the RBI slashed interest rates and changed the policy stance from neutral to an accommodative one. The repo rate is now positioned at 5.75%.
While it seems that RBI has slashed rates to combat a staggering GDP, many bankers feel a cut of 25 basis points will be insufficient to actually make a difference.
“The RBI policy decision to change the policy stance to “ accommodative” will simultaneously help the financial system to navigate to a lower term structure of interest rates and also accommodate growth concerns. On the regulatory front, the decision to lower the Basel III Leverage Ratio will augment the lendable resources of the Banks. Also the move to scrap transaction charges for RTGS & NEFT will boost digital transactions, ” said Mr. Rajnish Kumar, Chairman, SBI.
“The decision to issue draft for “on-tap” licensing of small finance banks will add depth to this sector. Launching of the on-line trading platform for retail participants is a positive development for small & medium forex customers. The RBI intent to harmonize existing regulations for different money market products augurs well for market transparency,” he adds.
“RBI has cut the Benchmark Policy Rate- Repo by 25 bps to 5.75% in its Second Bi-Monthly Monetary Policy (2019-20) Statement released today. But the major part of the statement was the change of stance from ‘neutral’ to ‘accommodative’, which rules out any rate hikes in future. Suppressed inflation and real sector performance were the major parameters behind this decision. RBI has revised slightly downwards the inflationary outlook for Second Half of FY2019-20, which is a positive for the banking sector. Expectations of ‘normal’ monsoon also aided the MPC in coming out with this cut, said Shri Dinabandhu Mohapatra, MD & CEO, Bank of India.
On the growth side, RBI has shown concern over the dwindling domestic investment activities and softening global economy impacting India’s growth in the current financial year. It has revised downwards the GDP growth in current financial year, which will influence sentiments of the market participants,” he added.
“For the third successive time, in line with the majority market expectations, the Monetary Policy Committee cut the benchmark Repo rate by 25 bps. Following this action, the benchmark Repo rate now at 5.75% is the lowest in the last 9 years,” said Mr. Naresh Takkar, MD & Group CEO, ICRA Ltd.
“With downward revision in GDP growth forecast for FY2020 to 7.0% and comfortable inflation estimates of 3.0-3.7%, the vote of the MPC members was unanimous and in favour of the rate cut along with the change in stance from neutral to accommodative. This clearly highlights the shift in preference towards growth, as inflation indicators are likely to remain within the targeted band,” he adds.
Naresh Thakkar adds that the rate transmission so far by the banks have only been modest in relation to the rate cuts announced, a pick up in the pace of monetary transmission would be one of the key drivers in supporting the growth estimates for the current year.
According to Zarin Daruwala, Standard Chartered Bank, liquidity can be tackled as the interest rates are cut.
“The combination of the repo rate cut, the change to an accommodative stance and the resolve to provide adequate liquidity, will provide the impetus to counter growth and investment headwinds. A review of the liquidity framework is a welcome move and should aid monetary transmission. Additionally, the easing of the leverage ratio requirement will boost bank lending and should serve as the much needed countercyclical stimulus,” she added.
