Rate pause as expected: Key takeaways from RBI’s sixth bi-monthly policy
As widely expected, the Reserve Bank of India (RBI) kept the repo rate unchanged at 5.15% for its sixth bi-monthly monetary policy for the year 2019–20., to avoid high inflation levels. The reverse repo rate was also maintained at 4.90%.
The six-member monetary policy committee (MPC) (that includes RBI Governor Shaktikanta Das) decided to continue with the ‘accommodative’ stance as long as it is necessary to revive growth while ensuring that inflation remains within the target.
Helping you understand the basics –
Repo rate: A rate at which the Reserve Bank of India (RBI) lends money to commercial banks in case of shortage of funds. Monetary authorities use repo rate as one of the main tools to control inflation.
Reverse repo rate: The opposite of repo rate i.e., a rate at which the commercial banks lend money to the RBI. The banks park their excess money with the central bank for short-term usually. Reverse repo rate helps to control the money supply in the economy.
#Fact: The repo rate is always higher than the reverse repo rate
The accommodative stance is an attempt to loosen the money supply and make it easy for businesses to borrow money. The stance surpasses the possibility of rate hikes for the time period.
The monetary policy trend for 2019–20
Rate cuts and then pause button...
Inflation and growth targets
The central bank projects future inflation and gross domestic product (GDP) targets for the upcoming quarters based on the economic scenario in every policy.
-> The consumer price index (CPI) inflation projection is revised upwards to 6.5% for Q4FY20 and 5.4–5.0% for the first half (H1) of 2020–21 i.e., FY21.
-> The growth outlook — GDP growth for 2020–21 is projected at 6% while 5.5–6% range is estimated in the first half (H1) of 2020–21.
Major highlight: Easing norms for real estate sector
In a separate statement just after the policy outcome, the RBI announced relief for the real estate sector. It has decided to -
Allow extension of date of commencement of commercial operations (DCCO) of project loans for commercial real estate by another one year if the delayed reason is genuine. The banks need not downgrade the asset classification in such a case.
This move, for now, will help developers focus on completing projects. It will also ease banks’ worry about projects turning into non-performing assets (NPAs). The realty stocks surged in today’s trading session after the announcement of this much-needed relief.
Incentivising bank credit
The RBI in the separate guideline also stated that it is incentivizing the flow of bank credit i.e., increase their lending to specific sectors like vehicle loans, residential housing loans and loans to micro, small and medium enterprises (MSMEs).
Thus, this move will help revive demand and consumption in such sectors.
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