Key Takeaways of Fourth Bi-Monthly RBI Monetary Policy
Key Policy rate Changes
· The MPC have decided to maintain the accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within target and subsequently reduced the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points (bps) from 5.4% to 5.15% with immediate effect
· Consequently, the reverse repo rate under the LAF stands revised to 4.9%, MSF rate and the Bank Rate to 5.4%
· Real GDP growth for 2019-20 is revised downwards from 6.9% (August policy) to 6.1%
Other Key Development Measures
1) Increase in NBFC-MFI income and lending limit – Positive for all MFIs
· As per the panel, taking into consideration the important role played by MFIs in delivering credit to those in the bottom of the economic pyramid and enable them to play their assigned role in a growing economy, it is proposed to revise these criteria as
. Increase the household income limit for borrowers of NBFC-MFIs from the current level of INR 1.00 lakh for rural areas and INR 1.60 lakh for urban/semi urban areas to INR 1.25 lakh and INR 2.00 lakh, respectively.
. Raise the lending limit from INR 1.00 lakh to INR 1.25 lakh per eligible borrower
2) Transmission of rate cut
· Out of the Cumulative 110 bps cut in Repo Rate between February – August 2019 by RBI, banks have passed on only 29 bps rate cut for fresh rupee loans while outstanding rupee loans have seen an increase in Weighted average lending rate (WALR) by 7 bps
3) CP & CD issuances mainly by high rated companies
· The monetary policy statement mentioned that Interest rates on CPs moderated noticeably during H1, particularly those issued by non-banking financial companies (NBFCs)
· Fresh issuances of CDs declined to INR 1,75,305 cr during H1:2019-20 (up to September 13, 2019) as compared with INR 1,98,829 cr during the H1:2018-19.
· Primary issuances of CPs also declined to INR 11,92,277 cr during H1:2019-20 from INR 13,58,117 cr during H1:2018- 19, with more than 99 per cent of the issuances by companies with A1+ rating. CP issuances moderated from July reflecting heightened risk aversion in view of downgrading of a few CP issuers in June and July 2019.