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10 key takeaways from the MPC meet

A 25 bps cut could be called as new financial year gift from the Reserve Bank of India (RBI), but lingering concerns of a slowdown in the global economy remain a concern.

On Thursday, the Reserve Bank of India (RBI) on expected lines slashed repo rate by 25 bps to 6 percent and kept the stance unchanged to ‘Neutral’. This is the second rate cut in 2019.

“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,” the central bank said in a statement.

“The RBI has adopted a very sensible and pragmatic approach by cutting the repo rate by 0.25% while keeping the policy stance neutral. It takes cognizance of the likelihood or potential for inflationary pressures emerging from food prices and fuel prices, and also fiscal pressures from the large government borrowing program,” Dr. Joseph Thomas, Head Research- Emkay Wealth Management.

Global central banks are already responding with dovish policies which is a shift from stance a few months ago. For India, most experts are penciling in another 25 bps rate cut in 2019 as inflation is expected to remain below RBI’s target.

Prakash Pandey, Director & Head of Research at Fairwealth Securities said that rising crude oil prices, upcoming general elections and global ‘trade tension’ this 25 bps rate cut is a prudent step towards pushing overall economic growth.

“This will definitely help NBFCs and small finance banks like Equitas, Ujjivan Financial Services and L&T Finance. We are hoping another 25 bps rate cut in June policy. This welcome move will help the Auto sector and Real Estate sector up to a certain extent,” he said.

The minutes of the MPC’s meeting will be published by April 18, 2019, and the next meeting of the MPC is scheduled for June 3–6, 2019.

Here is a list of 10 factors as mentioned by the Reserve Bank of India in its policy statement:

Slowdown in global economy:

Since the last MPC meeting in February 2019, global economic activity has been losing pace, and the Reserve Bank of India has taken note of that. In the US, the subdued performance in the final quarter of 2018 appears to have continued into Q1 2019 as reflected in declining factory activity.

The euroarea slowed in Q4 of 2018 on soft domestic demand and contracting manufacturing activity even the Italian economy contracted for two consecutive quarters in Q3 and Q4. In UK, growth slowed on Brexit uncertainty, with industrial production contracting during September-January.

The monetary policy stances of the US Fed and central banks in other major advanced economies (AEs) have turned dovish.

Slowdown in GDP growth:

GDP growth for 2019–20 in the February policy was projected at 7.4 percent in the range of 7.2–7.4 percent in H1, and 7.5 percent in Q3 — with risks evenly balanced.

Since then, there are some signs of domestic investment activity weakening as reflected in a slowdown in production and imports of capital goods. The moderation of growth in the global economy might impact India’s exports.

Taking in account of multiple factors which could impact India’s growth story, RBI trimmed GDP growth for 2019–20 which projected at 7.2 percent — in the range of 6.8–7.1 percent in H1:2019–20 and 7.3–7.4 percent in H2 — with risks evenly balanced.

Inflation:

The inflation path during 2019–20 is likely to be shaped by several factors. Assuming a normal monsoon in 2019, the path of CPI inflation is revised downwards to 2.4 percent in Q4 2018–19, 2.9–3.0 percent in H1: 2019–20 and 3.5–3.8 percent in H2: 2019–20, with risks broadly balanced.

Private investment remain sluggish:

The MPC notes that the output gap remains negative and the domestic economy is facing headwinds, especially on the global front. The need is to strengthen domestic growth impulses by spurring private investment which has remained sluggish.

High frequency indicators suggest slowdown:

High-frequency indicators of the services sector suggest significant moderation in activity. Sales of commercial vehicles contracted during February. Other indicators of the transportation sector, viz., port freight traffic and international air freight traffic, also contracted, said the RBI note.

However, indicators of the construction sector, viz., consumption of steel and production of cement, continued to show healthy growth. The services PMI continued to be in expansion zone for the tenth consecutive month in March 2019.

Committee on development of Housing Finance securitisation market:

Globally, residential and commercial mortgages are supported by well-lubricated securitisation markets whereby mortgage originators package portfolios of mortgages and resell them in capital markets as mortgage-backed securities or covered bonds.

The Reserve Bank has decided to constitute a Committee that will assess the state of housing finance securitisation markets in India. The committe will study the best international practices as well as lessons learnt from the global financial crisis, and propose measures to further develop these markets in India by identifying critical steps.

The composition and terms of reference of the Committee will be announced shortly. The Report of the Committee will be due by the end of August 2019.

Permitting G-sec through ICSDs:

Pursuant to the announcement made in the Union Budget for 2014–15 on “allowing international settlement of Indian debt securities”, the Reserve Bank, in consultation with the Government, had initiated discussions with International Central Securities Depositories ICSDs to permit their non-resident clients to transact in Government securities.

“It is now proposed to commence the process of implementation of the international settlement of Government securities by ICSDs. This would open up a new channel for non-residents to undertake Government securities transactions,” said the RBI statement.

It further added that operational details in this regard will be worked out with ICSDs in consultation with the Government and the Securities Exchange Board of India (SEBI).

Licensing of NBFCs as authorised dealer Category II:

With a view to improve the ease of undertaking forex transactions by increasing the last-mile touch points of regulated entities to sell foreign exchange for non-trade current account transactions, it has been decided that non-deposit taking systemically important Non-Banking Financial Companies (NBFCs-NDSI) in the category of Investment & Credit Companies (ICCs) will be made eligible to apply for grant of Authorised Dealer Category II licence.

Development of Secondary Market for Corporate Loans:

Recognising the benefits of an active secondary market in loans, the Reserve Bank will set up a Task Force to study the relevant aspects including best international practices and propose measures for developing a thriving secondary market for corporate loans in India.

The measures explored would include, inter alia, loan contract standards, digital loan contract registry, ease of due diligence and verification by potential loan buyers, an online platform for loan sales/ auctions, and accessible archive of historical market data on bids and sale prices for loans, said the RBI statement.

Additional 2% of SLR to be recognized as LCR:

With a view to move further towards harmonisation of the effective liquidity requirements of banks with the LCR, it has been decided by the RBI to permit banks to reckon an additional 2 percent of Government securities within the mandatory SLR requirement, as FALLCR for the purpose of computing LCR, in a phased manner.

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