RBI cuts rates to support sagging Indian economy; announces measures

The Reserve Bank of India on Thursday cut interest rates by 25 basis points in its latest credit policy for the third time this year. It also signalled the possibility of more rate cuts as it looks to support a sagging Indian economy. It also announced some measures to increase retail investor participation in government securities and the foreign exchange market.

“The problem for India is that fundamentals are not good, and the base is weak in terms of declining GDP growth momentum, widening fiscal deficit, stagnant exports and lackluster infrastructure growth,” said Moses Harding, veteran banker and former chief executive officer, India and East Africa for State Bank of Mauritius Group.

“This monetary policy is trying to hold the base together before it disintegrates so it should help in improving some domestic sentiment which could then help offshore investments into the country.”

Photo courtesy: Wikimedia
Photo courtesy: Wikimedia

There is still a long road ahead before non-resident Indians started investing heavily in India. “The dollar’s value against the rupee, now in the 68.50-70 band, has to move 5-10% higher to spur what has been static export growth and that may be the point when NRIs and more broadly foreign investors would find long term value in sending more money into India,” he said.

Below are excerpts of the RBI’s policy announcements:

  • In Q4 of 2018-19, GDP growth decelerated sharply to 5.8 per cent, down from 6.6 per cent in Q3 and 8.1 per cent a year ago.
  • Exports grew by 0.6 per cent in April 2019, but imports grew at a somewhat accelerated pace, leading to a widening of the trade deficit. After a sharp recovery in March 2019, net foreign portfolio inflows have been relatively modest at US$ 2.3 billion in 2019-20 in April-May. India’s foreign exchange reserves were at US$ 421.9 billion on May 31, 2019.
  • Banks have been monitored against an indicative Basel III Leverage Ratio of 4.5% to mitigate risks of excessive leverage. Keeping in mind financial stability and with a view to moving further towards harmonization with Basel-III standards, it has been decided that the minimum Leverage Ratio should be 4% for Domestic Systemically Important Banks (DSIBs) and 3.5% for other banks.
  • Draft guidelines to be issued for ‘on tap’ Licensing of Small Finance Banks by the end of August 2019. More time is needed to review the performance of Payments Banks before considering the licensing of more payment banks to be ‘on tap’.
  • In August 2010, the Reserve Bank introduced a separate framework for the regulation of systemically important Core Investment Companies (CICs). In the light of the increased complexity of these corporate structures, their growing inter-connectedness with the financial system and the various recent developments, it has been decided to set up a Working Group to review the regulatory guidelines and supervisory framework applicable to CICs.
  • Decided to constitute an Internal Working Group to review comprehensively the existing liquidity management framework and suggest measures to simplify the current liquidity management framework and clearly communicate the objectives, quantitative measures and toolkit of liquidity management by the Reserve Bank. The Group is expected to submit its report by mid-July 2019.
  • Foreign exchange trading platform developed by the Clearing Corporation of India (CCIL) and is being tested by users. The platform will be available to retail users for transactions from early August 2019. Operational guidelines for the platform shall be issued by the end of June 2019.
  • Specified Stock Exchanges approved by SEBI to act as Aggregators/Facilitators to aggregate the bids of their stockbrokers/other retail participants and submit a single consolidated bid under the non-competitive segment of the primary auctions of State Development Loans (SDLs). The measure, to encourage retail participation in government securities, will be implemented in consultation with the respective State governments.
  • Decided to do away with the charges levied by the Reserve Bank for transactions processed in the RTGS and NEFT systems in order to provide an impetus to digital funds movement. Banks will be required, in turn, to pass these benefits to their customers. Instructions to banks in this regard will be issued within a week.
  • Committee set up to examine the entire gamut of ATM charges and fees. The Committee is expected to submit its recommendations within two months of its first meeting.