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Monetary policy: RBI cuts repo rate by 25 bps

FE Bureau
Monetary policy, RBI cuts repo rate, tax collections, corporation tax, Shaktikanta Das, fiscal deficit, Credit Suisse, Axis Bank

Stocks and bonds sold off sharply on Friday after the Reserve Bank of India (RBI) lowered its growth forecast for 2019-20 by a sharp 80 basis points to 6.1%, almost eclipsing the 25 basis points cut in the repo rate to 5.15%.
The cut brings the total reduction in the policy rate, since February this year, to 135 bps. Investors in the stock market remain unconvinced that lower loan interest can help revive the economy beyond a point.

The bond markets are anxious the huge shortfall in tax collections, coupled with the large stimulus given by the government in the form of big cuts in the corporation tax, would see a higher fiscal deficit than currently budgeted for. RBI governor Shaktikanta Das, however, said he had no reason to disbelieve the government's statement that the deficit would slip.

Neelkanth Mishra of Credit Suisse pointed out that not only was the real repo still high, term premium was also elevated. With a large term premium and wider credit spreads, borrowing rates appear to be stuck at a high level," Mishra said.

While bankers are expected to drop loan rates since several of them have pegged these to the repo rate, the benefits are unlikely to be widespread. Arjit Basu, MD, State bank of India said the lender would examine what needed to be done post the repo cut.

Basu pointed out that the loan rates would vary depending on the size of the loan and the credit risk attached to different customers. Basu added that in the case of SBI, only 30 % of the loan book was linked to the external benchmark.

Rajiv Anand , ED, wholesale banking, Axis Bank, observed that while there would be a fall in rates, it might not be the same for all customers. "For the premium customers it could be a little more while for the less premium customers it will be a little less," Anand explained. He added that going forward, the ability of banks to offer fixed rate loans would also increase and the customer can choose what is most appropriate.

Economists believe a bigger cut might have helped. "Considering the weaker-than-expected growth outlook, we believe a front-loaded policy action would have been the right approach, as it would have enabled banks to sharply lower their lending rates ahead of the upcoming festive season, Sonal Varma, economist at Nomura, wrote. Governor Das observed at the press conference that the latest 25 bps cut should be seen in the light of the 110 bps cut so far in 2019.

DK Joshi, chief economist at CRISIL, wrote that banks are gradually linking their loans to repo rate. "But given the flexibility to charge a spread or a mark-up, considering other costs, the final lending rates are yet to come down in a commensurate manner," Joshi pointed out.

The Sensex crashed 433.56 points while the yield on the benchmark jumped 8 basis points to close at 6.69%. The central bank retained its accommodative stance hiting that the rate cuts were not over.