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- Transmission of rate cuts by banks to the borrower is expected to improve. Out of 75bps cut by RBI till June, only 29bps has been transmitted.
- Although government spending has picked up from July onward, private consumption and investment activity remain sluggish
- Liquidity in the system is in large surplus and not a concern.
- Boosting aggregate demand, especially private investment, is the key priority.
- Expects inflation to go up by 50–60bps in H2 due to higher food prices and rainfall deficiency. RBI expects downside risks to its forecast of GDP growth for India.
Repo rate cut by 35bps to 5.4%; Reverse rate adjusted to 5.15% and Bank rate to 5.65%.
- As per RBI, 50bps cut would have been excessive in current circumstances.
- This is the fourth consecutive rate cut, totalling a cut of 110bps in 2019.
- Policy stance maintained at Accommodative.
RBI comments on Growth and Inflation projections:
- Global slowdown and escalating trade tensions are posing downside risks. FY20 GDP growth target cut by 10bps to 6.9%. In H1, it is expected to expand 5.8–6.6%, and in H2 it is estimated at 7.3–7.5%, base effect to aid the growth in the second half.
- For H1 FY21, GDP is expected to expand 7.4%.
- CPI projected at 3.4-3.7% for H2 from 3.0-3.1% in H1.
- Crude oil prices may remain volatile due to geopolitical tensions.
On Transmission of rate cuts to borrowers:
- RBI is in talks with the banks, expects higher transmission, as banks come out of NPA issues.
- Liquidity was surplus in June-July due to return of currency to banks, drawdown of excess CRR balances by banks, open market operations (OMO), and forex market operations. RBI has conducted two OMO purchase auctions totalling Rs 27,500 crore in June.
Measures to enhance credit supply to NBFCs:
- Bank’s lending limit to NBFCs raised to 20% of the tier-1 capital of a bank from previous 15%.
- RBI is consistently monitoring the liquidity situation and intends to protect large and systematically important NBFCs.
- Bank’s lending to NBFCs for on-lending to Agriculture upto Rs 1M, MSMEs up to Rs 2M and housing up to Rs 2M per borrower will be considered as priority sector lending.
- Lending activity of any bank depends on its own risk assessment, and as a regulator RBI cannot force a bank to increase its lending to particular segment.
- It continues to have constant interaction with the government at highest level. Decision of MPC is autonomous.
- At the moment, CRR cut is not in proposal. Future rate cycle will depend on the incoming data.
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