Lacklustre RBI credit policy

The Reserve Bank of India’s (RBI) six-member Monetary Policy Committee (MPC) has acted on expected lines by maintaining status quo on key policy rates except downward revision in the Statutory Liquidity Ratio (SLR) by 25 basis points at 19.25%. The decision was 5:1 with Ravindra Dholakia rightly recommending for change of stance from ‘calibrated tightening’ to ‘neutral’.

The repo rate — rate at which banks borrow from RBI — is unchanged at 6.5%. Reverse repo rate — rate at which RBI borrows from banks — is at 6.25%. The Cash Reserve Ratio (CRR) — share of deposits which
banks must park with RBI without earning any interest — is unchanged at 4% and the Statutory Liquidity Ratio (SLR) — ‘the reserves’ banks are required to maintain in the form of gold or government approved securities/bonds — has been reduced to 19.25%.

Obsessed with the mandate of ‘inflation targeting’ as legislated to ensure inflation at 4% (+/-), the MPC has again done a volte-face by shifting the goalpost of inflation forecast by lowering the retail inflation projection 2.7-3.2% during October-March 2019 - revised from 3.9% — 4.5% forecast in the October policy. The rationale behind the continuous revision in the forecasts is reversal of the upside risks envisaged in the October policy.

Crude oil prices plummeted by 30% from $85 per barrel in October to the present $62.39; robust growth in GDP in the April-June 2018 quarter at 8.2% as against an alarming slippage to 7.1% during July-September 2018; and continued benign CPI inflation at 3.31% in October 2018 (3.77% in September) — all belying the fears of MPC of spiralling inflation on account of increased minimum support prices to crops and HRA impact of the 7th pay commission.

In spite of the continued fall in CPI inflation, softening of the rupee versus dollar at Rs 70.4 as on December 3, 2018 versus Rs 73.77 — October 5, 2018, increased flow of bank credit across sectors, non-food bank credit growing faster than nominal GDP, Nikkie Manufacturing Purchasing Managers’ Index (PMI) risen to 54 in November (reading of below 50 signifies growth contraction), services PMI jumping to 53.7 in November, maintaining the stance of ‘calibrated tightening’ is intriguing.

This sends wrong signals to industries, banks, borrowers and will have bearing on the cost of funds. Reduction in repo rate by at least 25 basis points would have softened lending rates. Cut in cash reserve ratio by minimum 25 basis points would have resulted in liquidity of Rs 65,000 crore. The RBI governor refuted by stating that CRR does not come under the ambit of MPC!

The MPC has flagged the risks to the inflation outlook. Rebound of crude oil prices which will have cascading effect on food and core inflation is envisaged. The MPC has cautioned by stating “although recent food inflation prints have surprised on the downside and prices of petroleum products have soften considerably, it is important to monitor their evolution closely and allow heightened short-term uncertainties to be resolved by incoming data”.

If they do not materialise, the MPC may go for ‘rate cuts’ subject to the fiscal deficit position which has aggravated and has already crossed 105% of the budget estimate. The Committee has kept the GDP growth forecast for the current fiscal at 7.4% which looks doubtful keeping in view the downslide in GDP to 7.1% in Q2 which necessitates average growth at 7.3% continuously in the next two quarters, which is very ambitious.

Nothing concrete has been addressed on the liquidity woes of NBFCs/HFCs. Their cost of funds are very high which will in turn have bearing on their pattern of lending, asset quality and NPAs.

RBI’s Viral Acharya, however, made the textbook statement “RBI is ready to stand as a lender of the last resort, if required”. To ease liquidity and to push the banks to aggressively lend to core sectors, the Statutory Liquidity Ratio (SLR) has been reduced by 25 basis points at 19.25%.

Pumping liquidity

Reduction by 25 bps will happen each quarter starting from January-March 2019, until it reaches 18% of deposits in alignment
with the Liquidity Coverage Ratio. This may not have the desired effect of pumping liquidity, as banks are already maintaining surplus SLR of over 28%. However, the deputy governor reiterated that ‘durable liquidity’ will be injected by way of periodic Open Market Operations — already, injected Rs 1.36 lakh crore and further Rs 40,000 crore is scheduled in December.

To ensure greater transparency in charging interest rates on retail loans, banks will have to henceforth determine ‘external benchmarks’ for floating rate loans instead of marginal cost lending rates (MCLR) — which was opaque. Benchmarks can be repo rate, GOI 91 days/182 days treasury bill yield. Banks can have a ‘spread’ over the decided benchmark rate which will remain unchanged throughout the tenure of the loan.

The new guidelines will be applicable for floating rate loans for housing, personal, auto, micro and small enterprises sanctioned with effect from April 1, 2019. It is unclear whether the guidelines are applicable to NBFCs/HFCs, which is critical.

(The writer is a Bengaluru-based banker)