The monetary policy had little by way of surprise when it announced a 25 basis point cut in rates. That was already factored in the market. In fact, the market was hoping for a bigger cut or a shift in stance to “accommodative”. That was not to happen as the RBI stuck to its neutral stance. If you look at the rate cut from a broader perspective, it just restores the status quo prior to June 2018. The RBI had earlier hiked rates by 50 bps in June and August. So, the cuts in February and April only restore the original status of rates.
Rates and liquidity
Interestingly, the monetary policy has focused on rates and liquidity. This is, after all, the first monetary policy of the new fiscal year and the last monetary policy before the general elections. The rate cut of 25 basis points has been made without changing the stance. Effectively, the RBI has retained the privilege of moving rates either ways depending on the level of inflation post the elections. The liquidity taps have been supported at various levels. While the RBI has committed to continue with its Rs.40,000 crore OMOs per month, it has also hinted at sustained dollar swap auctions. Together, these will infuse nearly Rs.80,000 crore per month of liquidity and take care of the shortfall in the financial markets. The additional leeway of 200 bps in HQLA as part of the NDTL deposits will also be a boost to lendable resources of banks.
Why not more aggressive
That is a question that will be debated but most likely the RBI wants to assess the impact on transmission. It was disappointing first time around. Also, the RBI believes that the huge liquidity infusion will anyways bring down yields at the short end. In addition, since banks will be flush with liquidity, they will have no choice but transmit the rate cuts to the end user. Like in the case of demonetization, transmission is best achieved through surplus liquidity and that is what the RBI is targeting at this point of time.
Focus on bigger reforms
The policy has dealt in elaborate detail on other aspects of financial reforms that are outside the ambit of traditional rates and liquidity management. Firstly, the RBI has set up a task force for secondary market listing of corporate loans. This will ensure an exit route for banks and also finer and timely pricing of loans. Secondly, the monetary policy has also talked about expediting a full-fledged securitization secondary market. This will provide an active secondary market for housing finance companies to monetize their housing receivables and also provide an additional avenue for investors. In a way, the monetary policy has chosen to go way beyond mere optics on rates and liquidity and has focused on larger reforms. For that, the RBI must be given due credit! ©
