By Sudhakar Atre :
Reserve Bank of India (RBI) has announced its sixth bi-monthly monetary policy for 2019-20 on February 6, 2020. 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 fifth and 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.
Due to recent spurt in inflation RBI has maintained the status quo of Repo Rate and also observed 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 0.55% (on an average) and weighted average lending rate (WALR) on fresh rupee loans sanctioned by banks by 0.69% only. It is also shocking that WALR on outstanding loans declined by 0.13% during February to December 2019. It is clear from the above analysis that the benefit of rate cuts have not been fully passed on by banks to borrowers. RBI feels that transmission is expected to improve in near future with introduction of the external benchmark system which mandates banks to link their lending rates to the repo rate wef October 1, 2019.
Taking cue from RBI, it is expected that banks will reduce lending rates further in near future. 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. This rate has also been not changed in December policy as well as in the present policy. However in spite of status quo in reverse repo rate banks are reducing interest rate on their deposits to maintain their profitability. This is adversely affecting senior citizens and other sections of society whose livelihood depends on interest on deposits. There are media reports that Government may reduce ROI on small savings schemes operated by Government from April by linking them with market benchmark like reverse repo rate.
Such drastic reduction in ROI on small savings schemes/bank deposits is adversely affecting depositors. There is a need to 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. 3) 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 Government 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 from 4.6 % in October to 5.5% in November and further to 7.4% in December 2019, to a highest level since July 2014.
Food inflation increased from 6.9 % in October to 12.2% in December. This is really a worrisome situation. However as per monetary policy, the main reason for recent surge in inflation is increasing onion and other vegetable prices. RBI opines that onion prices have already started falling with arrivals of the late kharif crop. Similarly the greatly improved prospects for the rabi harvest will help in reducing the food prices in the summer of 2020. RBI feels that inflation pressures will reduce in 2nd half of 2020-21. 4) The first advance estimates (FAE) released by the National Statistical Office (NSO) on January 7, 2020 placed India’s real gross domestic product (GDP) growth to slip to an 11-year low of 5% for 2019-20. Manufacturing growth in 2019-20 is seen at 2% year on year, which is at 15-year low, as against 6.9% growth in FY19. Construction growth is seen slipping to a six-year low of 3.2% in FY 20 from 8.7% in the last fiscal. Here it will not be out of place to compare the growth of emerging market economies. The Chinese economy slowed down to a 29-year low of 6.1% in 2019.
In reality it may be much lower as China lacks the credibility of its data. In Russia there was a loss of momentum in industrial production. In Brazil there was slowed down in industrial production and depressed retail sales. The South African economy recorded a negative growth of -0.6 % in third quarter. As compared to this India is the fastest-growing trillion-dollar economy in the world and with a nominal GDP of $2.94 trillion has become the fifth-largest economy in 2019, overtaking the UK and France. But in order to achieve the dream of 5 trillion dollar economy by 2024 we must grow at 12.4% which will be a challenging job under present global geo political and economic situation.
RBI has announced some bold initiatives in this Monetary Policy to boost sagging economy. These initiatives and their impact will be discussed separately. 5) However it is heartening to note that the foreign exchange reserves reached at an all time high at 471.4 billion US dollars on February 4, 2020, an increase of US$ 58.5 billion over March 2019. (The author is a freelance columnist on banking and finance. He can be contacted on [email protected])