RBI rate: panel shows its autonomy

The RBI monetary policy by the six-member Monetary Policy Committee (MPC) has maintained status quo on the key policy rates. However, the tone has been partially dovish and the stance neutral indicating a small window of rate reduction by the end of this year provided the low CPI inflation of less than 4% sustains.

The repo rate - rate at which the banks borrow from RBI is unchanged at 6.25%. Reverse repo – rate at which RBI borrows from banks at 6% - and the cash reserve ratio – share of deposits which banks must park with RBI without earning any interest – remain intact at 4%.

To bolster growth and support the prime minister’s initiative of providing “housing for all by 2022”, the RBI has reduced the risk weightage (bank capital to be set aside while lending) to be provided by the banks on certain individual housing loan segments with a cap on loan to value/cost of the house (LTV), with prospective effect. Housing has been treated as the main engine of growth.

For individual housing loans between Rs 30 lakh and Rs 75 lakh and LTV of 80%, the risk weight has been reduced to 35% from the earlier 50%. For loan amount up to Rs 30 lakh and LTV up to 80%, the risk weight will be 35% and for same amount with LTV 80-90%, the risk weight will be 50%.

For loans exceeding Rs 75 lakh and LTV less than 75%, the weightage is reduced to 50% from the existing 75%. This is in addition to reduction in standard asset (for all good loans without any delinquency) provisioning to 0.25% from 0.4%.

This move facilitates freeing the banks’ ‘capital’ for further lending. RBI Governor Urjit Patel made it explicitly clear that the thrust given to the housing sector is not only to boost affordable housing but to trigger the multiplier effect in the 130-plus ancillary industries.

This prudent move will give fillip to the sagging real estate sector and boost the morale of the builders especially in the backdrop of RERA (Real Estate Regulatory Authority) Act implementation and to motivate them to take up affordable housing projects.

However, the banks and housing finance companies (HFCs) should not go overboard and spoil the housing finance sector by reckless lending which they have “admirably demonstrated” in the infrastructure, roads, cement, steel, telecom sectors and now sitting on the mountain of NPAs to the tune of Rs 12 lakh crore.

The banks and HFCs have substantially reduced interest rates on housing loans with the introduction of marginal cost of funds-based lending rate (MCLR) in the range of 8.35%-10% and with the direct subsidy benefits from the National Housing Bank to the tune of Rs 2.2 lakh–Rs 3 lakh to the housing loan borrowers under the government’s housing schemes.


Risk weightage

With this, the financial institutions may marginally pass on the benefits from the “savings of risk weightage” to the borrowers  but will post better  net interest margins (NIM) to revive their  anaemic balance sheets. The RBI has also reduced the Statutory liquidity ratio (SLR) by 50 bps to 20% in order to provide liquidity to banks. The reduction is expected to pump in Rs 50,000 crore into the market.

The MPC was not carried away by the low CPI inflation at 2.99% in April, fall in food/vegetable, crude oil prices etc as it is shockingly contrasted with low GDP/Gross Value Added growth of 7.1%/6.7% for FY 2016-17. All the more scary is the Q4 (January-March 2017) GDP/ GVA growth at 6.1%/5.6% and dismal 2.5% growth in the eight core industries output (IIP) in April with negative growth in the critical “three `Cs’ sector” – coal, cement and crude oil.

The MPC has adopted the wait and watch policy. The durability of low inflation caused by demonetisation effect on cereals, pulses, vegetables over a time horizon of 3-6 months would be closely monitored. Surprisingly, the RBI has reduced its own first half year  inflation forecast to 2.25% (from 4.5%) and the second half year forecast to 4.5% from the earlier 5% target.

The MPC has also scaled down the FY 2018 GVA forecast to 7.3% from 7.4%. Indirectly, RBI has acknowledged on its weak analytics and projection capabilities by moving the CPI inflation/growth goalposts itself.

The MPC has pressed the ‘pause’ button on the rate cut clamour from the corporates, industries, retail borrowers and MSMEs as they perceive upside inflation risks from the  largesse of the Seventh Pay Commission on HRA, irresponsible farm loan waivers by certain state governments which can lead to fiscal collapse, to assess evenness of the monsoon effect, durability of the low CPI inflation level and impact of possible rate hike by the US Federal Reserve on flight of buoyant FDIs to better pastures.

The MPC has also displayed its independence and autonomy with 5:1 in agreement on the “rate hold” decision with the dissent by Ravindra Dholakia and the MPC members refusing the request of the officials of the Finance Ministry to meet them last week, ahead of the RBI policy.

(The writer is an economist and banker)