Coronavirus impact: Credit growth likely to remain modest, says RBI

MPC report says better transmission of rates would remain priority.

With the Covid-19 pandemic posing huge risks for the Indian economy, the credit growth is likely to remain modest, reflecting weak demand and risk aversion, said the Reserve Bank of India (RBI) in its monetary policy (MPC) report.

“Better transmission of monetary policy impulses to the credit market would remain a priority,” the RBI said.

Credit offtake in the economy has been fairly slow with non-food credit growing at 6.1 per cent in FY20 (up to March 13), compared to 14.4 per cent growth in the same period last fiscal year.

According to RBI, the slowdown in credit growth was spread across all banks, especially those in the private sector. However, in the recent period (December 2019-March 2020), the public sector banks (PSBs) have seen a slight uptick in credit offtake.

The data shows that of the incremental credit extended by scheduled commercial banks (SCBs) during the year (March 15, 2019 to March 13, 2020), 62.6 per cent was provided by private sector banks, 36.6 per cent by PSBs, and 0.8 per cent by foreign banks.

The report says banks’ investment in commercial papers (CPs), bonds, debentures, and shares of public and private corporates, which is a part of non-SLR (statutory liquidity ratio) investment, has gone down in the second half of FY20 (up to March 13) than a year ago because of lower investments, resulting non-food credit growth being lower.

“With credit offtake remaining muted and non-SLR investments declining, banks increased their SLR portfolios. Banks held excess SLR of 8.4 per cent of net demand and time liabilities (NDTL) on February 28, as compared with 6.3 per cent of NDTL at the end of March 2019,” RBI said.

RBI policy: Repo rate unchanged at 5.15%; FY21 GDP growth projected at 6%

In its last policy meet, the central bank had maintained the repo rate at 5.15 per cent points (bps).

The monetary policy committee (MPC) of the Reserve Bank of India (RBI) on Thursday kept the repo rate unchanged at 5.15 per cent — a 10-year low in its last policy review of the financial year 2019-20 (FY20).

Consequently, the reverse repo rate stands unchanged at 4.90 per cent.

Further, the bank said it will maintain 'accommodative' policy stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target.

The committee voted 6-0 in favour of the status quo of the interest rates.

GDP growth forecast for the financial year 2020-21 (FY21) is projected at 6 per cent and in the range of 5.5-6.0 per cent in the first half of the next fiscal and 6.2 per cent in Q3 (October-December period). GDP growth for FY 2019-20 is seen at 5.0 per cent.

The CPI inflation projection has been revised upwards to 6.5 per cent for Q4:2019-20; 5.4-5.0 per cent for H1:2020-21; and 3.2 per cent for Q3:2020-21, MPC said in its release.

 The MPC noted that inflation surged above the upper tolerance band around the target in December 2019, primarily on the back of the unusual spike in onion prices. However, going forward the onion prices are likely to ease on the improvement in supply conditions.

"Going forward, the trajectory of inflation excluding food and fuel needs to be carefully monitored as the pass-through of remaining revisions in mobile phone charges, the increase in prices of drugs and pharmaceuticals and the impact of new emission norms play out and feed into inflation formation," the statement added.

Michael Patra gets monetary policy dept in new role as RBI deputy guv

All these departments, in the past six months, were being managed by the three deputy governors.

Reserve Bank of India’s (RBI) new Deputy Governor Michael Patra (pictured) will be heading the Monetary Policy Department, including Forecasting and Modelling Unit, as was widely expected.

This department was earlier headed by B P Kanungo who took charge of the department after Viral Acharya left in July.

Patra will also be heading the Financial Markets Operations Department, Financial Markets Regulation Department including Market Intelligence, International Department, Department of Economic and Policy Research, Department of Statistics & Information Management, Corporate Strategy and Budget Department as well as the Financial Stability Unit, according to a statement on the RBI website.

All these departments, in the past six months, were being managed by the three deputy governors.

Patra was named the fourth deputy governor of the RBI on Tuesday by the government for a period of three years.

He was the executive director of the central bank, and an internal member of the six-member monetary policy committee.

As deputy governor in charge of Monetary Policy Department, Patra will continue to remain in the committee, whereas Kanungo will have to leave it.

The market and economists were expecting a sure cut in the policy review, considering the weak growth rate.

The Reserve Bank of India (RBI) on Thursday surprised the markets by exercising a “temporary pause” on its interest rate, as it waits to get more clarity on inflation and government measures in the upcoming Budget in February, before re-engaging with the Centre on the “national endeavour” of lifting growth.

The six-member monetary policy committee (MPC), headed by RBI Governor Shaktikanta Das, voted unanimously to keep the policy repo rate unchanged at 5.15 per cent. The RBI, however, revised its outlook for growth and inflation. The central bank revised down its 2019-20 growth forecast to 5 per cent from 6.1 per cent in the October policy review. The inflation forecast for the second half of 2019-20 was revised up from 3.5-3.7 per cent to 5.1-4.7 per cent.

Gross domestic product (GDP) growth for the second quarter came in at 4.5 per cent, the lowest since March 2012-13, according to the official data released recently. But the RBI is not worried about the slowdown, Das said in the policy press conference.

“We are just waiting for greater clarity. The government has taken several measures and the RBI has also reduced its rates subsequently. Liquidity has been in surplus mode. We should also allow some more time for the rate cuts to play out to be reflected properly. Therefore, the MPC decided to take a temporary pause,” Das said responding to a media query.

“There is a case of looking through the current spike in headline inflation, which is mainly due to a rise in food inflation. Our calculations show that food inflation in Q4FY20 is supposed to remain very high,” he said, adding that prices would start easing from February.

The market and economists were expecting a sure cut in the policy review, considering the weak growth rate.

The 10-year bond yields jumped about 15 basis points (bps) to close at 6.613 per cent on Thursday. Prices drop as yields rise.

“I cannot remember the last time there has been such a resounding surprise as far as the RBI decision is concerned. It defies the expectation of the market and also the body language of the central bank over the last six months or so when it seemed amenable towards out-of-the-box thinking and being very proactive in terms of supporting growth,” said Taimur Baig, chief economist of DBS Group.

Business Standard

Explained: Why RBI's repo rate cuts are not enough to bolster GDP growth

Transmission of rate cuts by banks has been slow because any lowering of interest rate, with deposit rates unchanged, will reduce banks' net interest income spread, affecting their revenue.

Business Standard : In order to boost the country’s sagging economy, the Reserve Bank of India’s (RBI’s) monetary policy committee, holding its fifth bimonthly meeting from Dec 3 to 5, is widely expected to again cut the key repo rate by 25 basis points (bps).

Official data released by the government last week showed that India’s gross domestic product (GDP) growth in the July-September quarter of 2019-20 slowed to a 26-quarter low of 4.5 per cent, on a year-on-year basis, for a number of reasons. Weak manufacturing growth, a fall in consumer demand and private investment, and lower exports due to a global slowdown were cited as some of them.

For its part, the RBI has lowered the repo rate — at which commercial banks borrow from it — by a cumulative 135 bps so far this calendar year to 5.15 per cent, the lowest in nine years. Even so, there has been little recovery in the economy during this period. Let’s understand why.

Relation between interest rate and GDP

For any bank, its net interest income (NII) — the difference between the interest it receives on loans given and the interest it pays on deposits — is the main source of its revenue.

A change in lending rate affects the cost of raising funds in the economy. For instance, a cut in lending rate makes loans cheaper. This prompts industrialists to borrow more for, say, capacity expansion (investment), and households for private consumption. This has a direct bearing on the country’s GDP, which, by definition, is the sum total of private consumption, private investment, government investment/spending, and net exports.

However, any cut in banks’ lending rate, should they continue paying interest on deposits at the same rate as before, would reduce their NII spread. That would have a negative impact on their revenues. So, that should explain why banks have shied away from transmitting RBI’s repo rate cuts to borrowers in the form of lending rate cuts.

During its fourth bimonthly review in October, the MPC noted that policy “transmission has remained staggered and incomplete”. In response to a 110-bp cumulative cut in repo, the weighted average lending rate cut on fresh loans had been only 29 bps, it said.

RBI policy boost in low-inflation phase: Here's what data says

The MPC expects low levels of inflation to continue for a long period.

In line with market expectations, the monetary policy committee (MPC) decided to reduce the benchmark repo rate by 25 basis points last week, to 6 per cent .

The nudge came from low levels of consumer price index (CPI) inflation, which remained below expectations. Though the core CPI inflation rate dropped but remained high at 5.3 per cent in February, headline CPI inflation remained low—rising a bit—to.

The MPC expects low levels of inflation to continue for a long period. It revised projections downward to 2.9-3.0 per cent in H1 FY20 and 3.5-3.8 per cent in H2 FY20.

Expected growth in FY20 was subsequently revised downward from the initial expectation of 7.4 per cent to 7.2 per cent. Many high frequency indicators “suggest significant moderation in activity”, the MPC noted.

It is evident in the sustained contraction in auto production.

Households too are expecting inflation to subside, with the three-month-ahead and the one-year-ahead expectations declining by 40 basis points

Oil showed a different picture, with the MPC underlining the rise in global crude oil prices, which rose 10 per cent since the last policy announcement in February.

Yet, some macro indicators remained in the positive, with the investment rate rising to 33.1 per cent of GDP in Q3 FY19 from 31.8 per cent of GDP in Q3 FY18.

This was supported by “the government’s thrust on the road sector and affordable housing,” the MPC said. Capacity utilisation in industry rose to its highest in the last six years.

Business Standard