Growth revival was clearly the overarching theme of the policy
The 25 bps rate cut by the Monetary Policy Committee was already factored in by the markets. However, the big overarching theme of the policy was the push to growth in a real sense.
25 bps rate cut for now
The rate cut of 25 bps was lower than what the markets had anticipated but there was a reason for the cautious approach adopted by the MPC. Rates are already at a 15-year low and room for maneuver is quite limited. Secondly, the government has already given a fiscal boost to Indian companies via the tax cuts and from that perspective, a 25 bps rate cut was par for the course. The real positive takeaway was that the stance of the policy was retained as “Accommodative” leaving room for more rate cuts if warranted by the data.
Growth the missing link
From the previous policy announcement itself, it was clear that growth was the big factor. GDP growth for the June quarter had fallen to just 5% and the RBI has projected GDP for the second quarter to grow at just 5.3%. The full year growth estimates of the RBI stand downgraded by 80 bps to 6.1%. That is something that underlines the gravity of the entire problem. We have also seen core sector growth dip into negative and the PMI services dipping below 50. For the RBI, the policy undertone has clearly been about giving the growth push.
Time for transmission
The key feature of the policy statement was that the RBI dwelt at length on the urgent need for transmission. By the RBI’s own analysis, out of the 135 bps rate cut till October 2019, the banks had only passed on 29 bps to borrowers. RBI has been quite clear that such a low rate of transmission would not work as rate cuts would not translate into lower borrowing rates and hence would not spur growth. However, the RBI has also expressed confidence that things would change rapidly. For example, banks have shifted to the external benchmark based loan pricing from October. That means; loan rates would be directly linked to repo rates or to the T-bill yield which will ensure smoother transmission to the end customers. That could be a big spur for growth in GDP.
Inflation is ambivalent
The RBI has projected inflation for the full year at a higher range of 3.2%-3.5% but has expressed confidence that it should be high enough to signify growth but low enough for more rate cuts. If inflation stays in that range then the RBI has good reason to further cut rates to support growth. While food inflation is likely to remain balanced, they are expecting fuel deflation to negate the impact of food inflation. With core inflation trending lower, the RBI does not have too many worries on the inflation front. Growth is the key!