Sixth Bi-monthly Monetary Policy Statement, 2019-20 Analysis

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Shared by Jaxay Shah, CREDAI National Chairman Key Highlights:

Policy repo rate unchanged at 5.15 per cent
Accommodative stance as long as it is necessary to revive growth, while ensuring inflation remains within the target. The MPC recognises that there is policy space available for future action.
Inflation Outlook balanced with the CPI inflation projection revised upwards to 6.5 per cent for Q4:2019-20; 5.4-5.0 per cent for H1:2020-21; and 3.2 per cent for Q3:2020-21. Headline inflation expected to be elevated in the short-run, at least through H1:2020-21.
GDP growth for 2020-21 is projected at 6.0 per cent – in the range of 5.5-6.0 per cent in H1 and 6.2 per cent in Q3.
Incentivising of bank credit to certain sectors like Housing, Auto & MSME by allowing banks to deduct incremental credit post 31st Jan 2019 from their net deposits for maintaining CRR.
The pricing of loans by scheduled commercial banks for the medium enterprises was also linked to an external benchmark effective April 1, 2020 in addition to new personal, retail and loans disbursed to MSME sector.
The benefit of one-time restructuring without an asset classification downgrade to standard accounts of GST registered MSMEs that were in default as on January 1, 2020 can now be implemented latest by December 31, 2020 vis-à-vis March 31 2020.
In commercial Real Estate, the date of commencement of commercial operations can be extended by 1 Year without affecting the asset classification of the loan for reasons beyond the control of the promoters.

Impact Analysis: Even though status quo was maintained in terms of policy rates, the central bank has given enough indications about monetary policy being available for addressing growth woes in the economy, provided inflation remains in the targeted band.

To quote Shaktikanta Das, Governer, RBI “the status quo decision for the second consecutive time should not be seen as a pointer to future action”.

On inflation, though uncertainty remains, food inflation is expected to cool off slowly thereby making rate cuts a possibility in 1Q/ 2Q of FY20-21. Enough focus was given to growth as a matter of concern in the policy and accommodative stance till required gives the market comfort balancing the fiscal deficit concerns. On the Banking side, efforts have been made to incentivise lending to certain sectors which have a multiplier effect on the economy like MSME, Housing and Auto, which should act positively on the credit disbursement to the sector and aid growth at the ground level. Transmission of rates clearly remains a crucial point on central bank agenda (65bps in bank loans vis-à-vis 135bps of rate cut since Jan 2019) and linking of loans to medium enterprises in addition to retail, personal loans and MSME sector is expected to facilitate the transmission however incrementally. With these linkages in place, RBI would want further rate cuts to directly impact the bank lending rates and hence more effective in aiding growth. Stress in economy has been accepted and relief in terms of extending policies to restructure loans to CRE in case of genuine delays in execution and MSMEs by a year has been extended. These are expected to help these sectors wade through the difficult times and in conjunction with efforts on rate transmission & lending incentivisation are expected to improve growth and credit disbursement in a medium term.

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