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RBI Monetary Policy Updates: Efforts on to ensure another large NBFC does not default, says governor Shaktikanta Das

FP Staff

RBI MPC LATEST Updates: RBI governor Shaktikanta Das has said that efforts are on to ensure that another large non-banking finance company (NBFC) does not default.

"We continue to monitor the PMC Bank situation, keeping in mind the interest of the depositors," he said.

Das said that as soon as the PMC Bank issue came to RBI notice, the banking regulator acted swiftly. He added, one incident should not be used to generalise the cooperative banking system, says Shaktikanta Das.

The RBI governor said that the Indian banking sector remains sound and stable.

Das said that he is not aware of any demand by the government for an interim dividend of Rs 30,000 crore from RBI.

Shaktikanta Das has said that the overall liquidity remained surplus in August and September 2019 despite the expansion of currency in circulation and forex operations by RBI draining liquidity from the system.

Global economy has lost further momentum, says RBI governor.

RBI said that its September 2019 round of inflation expectations survey indicates that households expect inflation to rise by 40 basis points over a 3-month ahead horizon and 20 basis points over a one-year ahead horizon.

RBI governor Shaktikanta Das has already hinted that benign inflation provides room for further monetary policy easing while space for fiscal space is limited.

The RBI is predicted to lower its key lending rate or the repo rate by 25 basis points (bps) to 5.15 percent, which would take cumulative cuts so far this year to 135 bps.

Most analysts forecast one more cut of 15 bps in December this year.

The government has announced a series of measures including steepest cut in corporate tax, rollback of enhanced surcharge on Foreign Portfolio Investors, among others to jump-start growth which hit a six-year low of 5 percent during the first quarter of the current fiscal.

The six-member MPC is scheduled to announce the fourth bi-monthly monetary policy for 2019-20 on Friday, after a three-day meeting.

There was no meeting of the panel on 2 October on account of Gandhi Jayanti.

The central bank has already slashed repo rate four times consecutively this year amounting to 110 basis points in aggregate.

At its last meeting in August, the Monetary Policy Committee (MPC) reduced the benchmark lending rate by an unusual 35 basis points to 5.40 percent.

The upcoming MPC meeting comes in the backdrop of RBI's mandate to banks to link their loan products to an external benchmark, like repo rate, for faster transmission of reduction in policy rates to borrowers, from 1 October.

Ahead of the meeting, the Das-headed Financial Stability and Development Council (FSDC) sub-committee took stock of the prevailing macroeconomic situation.

Earlier, the RBI governor had said that the government has little fiscal space, giving hope that the central bank may provide more monetary stimulus to prop up the economy.

The government's fiscal space has been squeezed on account of cut in rates of corporate tax as well as lowering of GST rate on various goods. Revenue collection too has been below the Budget estimates.

Experts are of the opinion that another rate cut is on the cards as the government's hands are tied and the onus of taking initiatives now rests with the central bank.

Shanti Ekambaram, president, Consumer Banking, Kotak Mahindra Bank, said with inflation still within the RBI's medium-term target of 4 percent, the MPC has the headroom to cut the repo rate further.

"However, the recent volatility in crude oil prices and the fiscal measures announced by the government will have an impact on inflation in the medium term and the fiscal deficit. Hence, we expect the MPC to be more measured in its response with a rate cut of 20-25 basis points in the October policy," she said.

"We continue to expect the RBI MPC to follow RBI Governor into another 'out-of-the-box' 35 basis points repo rate cut on 4 October. This should send a strong signal for bank lending rate cuts with the 'busy' industrial season round the corner," BofA Merrill Lynch said in a report.

According to NAREDCO president Niranjan Hiranandani, there is an expectation of a further 50 basis points repo rate cut in the backdrop of muted inflation which stands lower than the expected 3.2 percent.

The further reduction of repo rate will not only bring down the lending rates but also incentivise investment and boost consumption, he said.

While economic activities are showing signs of sluggishness, the policymakers are drawing solace from the fact that retail inflation remains in the comfort zone of the central bank.

Retail inflation inched up to 3.21 percent in August but remained within the RBI's comfort zone.

The RBI has been mandated by the government to ensure that inflation remains below 4 percent, with deviation of 2 percent on either side.

Experts and industry feel low inflation provides enough headroom for the RBI to further lower the policy rate, especially when festive season has just started. People make huge purchases during Navratras and Diwali.

With liquidity concerns in the NBFC sector almost taken care of, the real estate sector too is hopeful that the RBI will go in for the much-needed rate cut to boost demand for affordable housing.

€" With inputs from agencies

Also See: RBI Monetary policy: Central bank sharply cuts GDP growth forecast to 6.1% for current fiscal from 6.9% earlier

Corporate India welcomes RBI move; says rate cut will spur growth, revive investment and encourage consumption

RBI cuts repo rate by 25 bps to 5.15%: Central bank goes with the tide but reduction in interest rate cannot ensure pick-up in credit

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