The Monetary Policy Committee (MPC) has changed its stance from ‘neutral’ to ‘calibrated tightening’ on Thursday. It came in the MPCs sixth bi-monthly monetary policy review meeting. The surprise factor alongwith it was the repo rate that was cut of 25 basis points (bps).
The rate cut by the Reserve Bank of India (RBI) will help banks to address liquidity issues and at the same time, low cost of funds is likely to boost consumption, suggest experts. Fall in the cost of funds will also aid lending, so it is positive for banks as well as NBFCs.
“A rate cut of 25 basis points is an act of fine balance between maintaining real income and boosting economic growth. Benign inflation trajectory and low private capex were key enablers for a rate cut, which is good for mid and small-cap companies,” Dharmesh Kant, Head – Retail Research, IndiaNivesh told Moneycontrol.
The RBI has removed 100 percent risk weights for NBFCs and now their risk weights will be as per their rating, which is a positive development for higher rated NBFCs, suggest experts. The future commentary suggests that more cuts are in the offing that will be taken positively by traders and investors.
RBI said that with a view to facilitating the flow of credit to well-rated NBFCs, it has now been decided that rated exposures of banks to all NBFCs, excluding Core Investment Companies (CICs), would be risk-weighted. This will be as per the ratings assigned by the accredited rating agencies, in a manner similar to that for corporates.
“It’s a double bonanza for NBFCs—low cost of funds and a boost in consumption on account of low inflation/high disposal income. What interim Budget 2019 missed for corporates has been largely compensated by the monetary policy committee’s change in stance to neutral. It will bring stability to the financial environment,” Kant said.
In the fifth bi-monthly monetary policy resolution in December 2018, CPI inflation for 2018-19 was projected in the range of 2.7-3.2 percent in H2:2018-19 and 3.8-4.2 percent in H1:2019-20, with risks tilted to the upside.
The actual inflation outcome at 2.6 percent in Q3:2018-19 was marginally lower than the projection. There have been downward revisions in inflation projections during the course of the year, which hints at a possibility of further rate cuts in the offing.
“The RBI MPC has delighted market participants by changing stance to neutral and cutting repo rate by 25 bps. Q3FY20 inflation expectation cut to 3.9 percent means some more rate cuts can be expected in the course of the next few meetings,” Dhiraj Relli, MD & CEO, HDFC Securities on RBI Monetary Policy told Moneycontrol.
“Bond yields are likely to fall materially when FPIs revise their short-term view on India (overcoming their fears on the fiscal situation). Equity markets could rise some more, welcoming an attempt to address recent issues in the credit markets, ultimately leading to higher growth,” he said.