The RBI credit policy was announced on April 07th in the backdrop of 3 key events. Firstly, the food inflation has seen an uptick due to the unseasonal rains. This would have surely weighed on the RBI’s mind when it decided on rate cuts. Secondly, the entire world is waiting in anticipation to know the outcome of when the US Fed will actually start the rate hike process. Lastly, there are expectations on the front of rupee stability and announcement of special gold deposit scheme guidelines, in the light of the announcement made in the budget about leveraging on the vast stash of gold available with Indian households.
Highlights of the Credit Policy:
- The repo rate remains unchanged at 7.5%
- The cash reserve ratio (CRR) remains unchanged at 4%
- RBI sees CPI inflation at 5.8% by the end of the year, which is well within the 6% target
- RBI has eased lending limits for micro finance firms
- Banks have been permitted to invest in infrastructure bonds of other banks
- Industrial growth has regained momentum during the past year
- Non-food inflation has fallen for the 9th month in a row, although food inflation continues to be a concern on the back of unseasonal rains
- GDP growth has been projected at a healthy 7.8% for the fiscal 2015-16
Outcome of the Policy:
The policy will be short term negative for rate sensitive sectors like banks, real estate and automobiles. This is already visible in their stock prices.
The RBI has made a statement that the marginal cost of funding of banks has fallen, effectively putting the onus on banks to cut lending rates, before further rate cuts can be implemented.
RBI has also clarified that the policy will be shaped more by the Monetary Policy framework signed with the government of India and less by what the Fed does.
The good news, probably, came hidden in the fine print of the policy. The statement of the RBI that the Monetary Policy Framework will be the driving force is good news. The government has been keen on reviving growth and rate cuts may be the first step. Remember, both the rate cuts in 2015 were done outside the policy. One can expect that to repeat.
The onus will now by on banks to transmit previous rate cuts in the form of lower lending rates. The RBI has almost made it clear that the banks will have to move first on the transmission, before they can expect further rate cuts from the RBI. The ball is effectively in the courts of the Indian banks.