Fifth bi-monthly monetary policy of RBI
| Date :13-Dec-2019 |
By Sudhakar Atre :
Reserve Bank of India (RBI) has announced its fifth bi-monthly monetary policy for 2019-20 on December 5, 2019. The highlights of the policy are discussed here. 1) Repo rate is the rate at which RBI lends money to commercial banks. This serves as a benchmark for banks to decide their lending rates. RBI had reduced the repo rate from 5.40% to 5.15% in the October Policy. However, in the present policy the repo rate has been kept unchanged at 5.15%.
Historically when first Modi led NDA Government was formed in 2014 the repo rate was 8% (w.e.f. 28.01.2014) and since then it has been continuously reduced and now it as at the lowest since April 2010. The RBI has justified the non reduction of repo rate in this policy and stated that as against the cumulative reduction in the policy repo rate by 1.35% during February-October 2019, commercial banks have reduced their marginal cost of funds-based lending rate (MCLR) by 0.49% (on an average) and weighted average lending rate (WALR) on fresh rupee loans sanctioned by banks by 0.44% only. So the benefit is not fully passed by banks to borrowers.
Accordingly it is interesting to note that even though RBI has not announced any rate cut in this policy major banks like Bank of Baroda, Union Bank of India, UCO Bank, State Bank of India, HDFC Bank and Bank of India have reduced their MCLRs after the announcement of this monitory policy. It is expected that RBI will observe the pace of transmission and may take a call on reducing repo rate in the next policy. Incidentally, even the Federal Reserve of USA, a counterpart of our RBI has maintained status quo on policy rates in their policy announced on December 11. 2) Reverse repo rate is the short term borrowing rate at which RBI borrows money from banks. This rate serves as a benchmark rate for banks to decide their rate of interest (ROI) on deposits.
The RBI had reduced the reverse repo rate from 5.15% to 4.90% in the October policy. As reverse repo rate is linked with repo rate, this rate has also been not changed in December policy. Banks do not reduce the lending rates immediately after reduction in repo rate and even if it is reduced the full benefit is seldom passed on to the borrower but when reverse repo rate is reduced banks immediately reduce interest rate on their deposits which adversely affects senior citizens and other sections of society whose livelihood depends upon the interest on deposits. Major banks have reduced their ROI on deposits by 1.5% (average) during last 12 months. There are media reports that banks are requesting Government to reduce ROI on small savings schemes as banks are facing competition from them.
Government had already cut ROI on small savings instruments including PPF during last couple months but it is reported that banks are insisting for linking them with market benchmark like reverse repo rate. However, it should be expected that Government will understand that we are country of savers for sunset years. Moreover, recent financial inclusion initiatives have encouraged people to move from unorganised financial sectors to organised sectors and from investing in physical assets (gold, land etc.) to financial assets like Government small savings schemes, bank deposits, mutual funds etc.
Such drastic reduction in ROI on Government small savings schemes/ bank deposits may adversely affect this movement. It is high time that all stakeholders should evolve a mechanism so that interest of middle-class depositors is protected and they are not left to vagaries of lower ROI on deposits in the name of free market economy. The other major policy observations are as under: 1) It is mandatory on the part of RBI to maintain the medium-term target for Consumer Price Index (CPI) of 4% (within a band of +/- 2%), while supporting growth and Central and RBI have succeeded in keeping the inflation under control for last couple of months. But, retail inflation, measured by year on year changes in the CPI increased sharply to 4.6 % in October, propelled by an increase in food prices.
Food inflation increased to 6.9 % in October, at a 39-month high, pushed up by a sharp increase in prices of vegetables due to heavy unseasonal rains. Prices of onions, in particular, shot up by 45.3% in September and further by 19.6% in October. Inflation in several other food items such as fruits, milk, pulses and cereals also increased. Electricity prices also increased in October following a rise in user charges by power distribution companies (DISCOMs) across 13 States. But inflation in CPI excluding food and fuel decreased further from 4.2 % in September to 3.4 % in October. 2) Gross domestic product (GDP) growth decreased to 4.5% y-o-y in second quarter of 2019-20. This was the continuous decrease since last sixth consecutive quarter due to sharp slowdown in gross fixed capital formation.
According to RBI, Real GDP growth would have been at 3.1% but jump in Government final consumption expenditure increased it to 4.5%. However, RBI feels that several measures already initiated by the Government are gradually expected to further improve the economy. Data on corporate finance and on projects sanctioned by banks and financial institutions suggest some early signs of recovery in investment activity, though its sustainability needs to be watched. RBI has emphasised the need to address the factors which are holding back investments. It has also cautioned that a delay in revival of domestic demand, a further slowdown in global economic activity and geo-political tensions may pose risk for growth. 3) However the foreign exchange reserves reached at an all time high at 451.7 billion US dollars on December 3, 2019 an increase of 38.8 billion US dollars over March 2019. (The author is a freelance columnist on banking & finance. He can be contacted on [email protected])