InvestorQ : What were the key announcements in the credit policy announced for the investors in debt and equity?
Mitali Bhutta made post

What were the key announcements in the credit policy announced for the investors in debt and equity?

Dawn Cherian answered.
2 years ago

Even ahead of the monetary policy announcement, the markets were talking about a higher rate cut ranging from 35 basis points to 50 basis points. The reason was that growth had literally slackened in the fourth quarter of the last financial year and joblessness was at a multi-year high. Consider these numbers. The GDP growth rate had fallen to 5.8% in the fourth quarter and the full year growth was at 6.8%. In addition, the National Sample Survey Organization (NSSO) had given a discouraging figure of 6.1% unemployment, a number that was not seen in 45 years. It is in this light that the expectations of the policy were built up by markets and market traders as well as economists

Here are some of the major announcements in the monetary policy front…

· The repo rate (repurchase option rate) has been cut by 25 bps from 6% to 5.75%. This was slightly below what the optimists in the market were expecting at anywhere between 35 bps and 50 bps.

· You must also know that the reverse repo rate and the bank rate are decided automatically as a spread of 25 bps below and above the repo rate respectively. Therefore this 25 bps rate cut reduced the reverse repo rate to 5.50% and the bank rate and the MSF rate to 6%.

· You need to look at this rate cut in a slightly broader perspective because the net impact of this rate cut will just be a reduction of 25 bps cut in the last one year. That is because the MPC had hiked rates by 25 bps each in June and August 2018 and later it had cut by the same amount in as 25 bps in February 2019 and again by 25 bps in April 2019.

· A very important to note is the stance, which shows the outlook of the Monetary Policy Committee (MPC) with respect to future rate movement. The stance of the monetary policy has been changed from “Neutral” to “Accommodative”. This clearly indicates that the RBI has kept the doors open for more cuts if justified by data. What needs to be noted is that all the 6 members of the MPC voted unanimously for the 25-bps rate cut and also for the change in the stance of the policy to Accommodative, without any exception or any dissent.

· You need to understand why the RBI cut by only 25 bps and not by higher. While this is a policy response to weak growth, the MPC has been cautious due to the risks to inflation in case of a weak monsoon pushing up food prices. You cannot cut rates when inflation is moving higher as it will narrow the real rates too much and make Indian bonds unattractive for foreign investors in Indian debt markets. You must also note that the IMD and SKYMET (the two principal weather forecasting agencies in India) have been neutral to negative on monsoons.

The good news is on the liquidity front. RBI has tried to keep liquidity adequate and comfortable in the market through a mix of open market operations (OMO) and dollar swap auctions as and when required. The dollar swap auctions were introduced by the RBI in April to simultaneously infuse liquidity into the system and also suck out idle dollars from the banks to prevent rupee appreciation beyond a point. The only disappointment was that the policy did not have any specific measures to address the liquidity crisis that has afflicted NBFCs.