It seems that all Central Banks have decided to surprise the markets with unanticipated policy changes. New Zealand cut its key policy rate by 50 bps as against the expected 25 bps. Thailand also unexpectedly cut its rate by 25 bps as against the market-wide expectation of status quo. We now believe that the apparent short cycle of monetary policy normalisation by US Fed has turned into a uniform rate easing cycle across global central banks. Surprisingly, 2019 seems to be worse than 2008 with external strife of trade wars now getting integrated with domestic growth weakness in emerging economies.
In case of India, though the rate cut was expected, the magnitude threw a curveball. This is the first time that a 35 bps cut has been executed by RBI. Even as RBI has cut rates, the markets await future guidance from RBI in terms of quantum of cuts and perhaps this was reflected in G-sec rates witnessing a mild spike post policy. We, however, believe such thinking should prod RBI to use communication as a policy in itself rather than the policy statement being the vehicle for communication. In the same vein, RBI could now use the rate change in non multiples of 25 bps as a first step towards providing second generation signals to markets of future policy stance as the Fed does. Interestingly, RBI governor indicated in a media interaction post policy of not reading too much into real interest rates, but rather concentrate on reducing the widening output gap!
The RBI has taken a bazooka of measures to facilitate credit delivery mechanisms. The decision to reduce the risk weights from 125% to 100% for consumer credit, will release significant amount of capital for banks (around `22,000 crores). Treating NBFCs on par with other corporate exposure helps in harmonisation and is a positive for NBFCs. RBI has also allowed banks to register NBFCs (other than MFIs) for on-lending to specific sectors upto a certain level to be classified as priority sector lending. Opening NEFT 24/7 should increase the volumes. Presently, the average volume of transactions is around `19 trillion with 85 lakh average daily transactions. The proposal to create Central Payment Fraud Registry will boost customer confidence.
Finally, we strongly encourage that the RBI should now cajole banks towards external benchmarking. It may be noted that SBI is the only bank to have taken the lead in using repo rate on the asset side as an external benchmark beginning May 1, 2019 and savings bank on the liability side. We believe such an experiment can only be successful if all banks work in tandem and RBI could cajole banks on such. It may be noted that savings banks are mostly used for transactional purposes.
(The author is group chief economic adviser, SBI)