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Well-crafted monetary policy
The Monetary Policy Committee (MPC) decided to cut the Repo rate by 25 bps to 6.25% by 4-2 vote.

The MPC also revised the stance of monetary policy from calibrated tightening to neutral. RBI revised downwards the CPI inflation to 2.8% in Q4 FY19, 3.2-3.4% in H1 FY20 (earlier 3.8-4.2%) and 3.9% in Q3 FY20 on the back of assumption of normal monsoon, moderation in fuel prices and dissipation of HRA increase.

The results of Dec'18 indicate that inflation expectations of households softened by 80 basis points for the three-month ahead horizon and by 130 basis points for the twelve-month ahead horizon over the last round, reflecting the continued decline in food and fuel prices. For FY20, GDP growth is projected at 7.4% (7.2-7.4% in H1 and 7.5% in Q3). The risks include slowing global demand particularly trade tensions and associated uncertainties.

RBI has eased the overseas borrowing norms for bidders of stressed assets under the IBC. The resolution applicants under Corporate Insolvency Resolution Process can now utilize the ECB proceeds for rupee-loans of the insolvent company that they wish to buy. Though Indian banks' overseas branches or their subsidiaries are not eligible under this, however, this move is positive as it has opened up a new source of funds for the bidders.

RBI has raised the criteria for 'bulk deposits' for banks to Rs.2 crore from the current Rs.1 crore, to provide more operational freedom to the banks to raise funds. So, now banks would treat deposits upto Rs.2 crore as retail deposits, where the interest rate is fixed for a given maturity, irrespective of the amount deposited. Further, the bulk deposits (including card & DIR) are only around 20% of the total time deposits of the banks. So, with this change in criteria, around Rs 1 lakh crore of bulk deposits will now be termed as retail deposits. As bulk deposits are sensitive deposits, the reduction in their share will help the banks to have better ALM management and better price discovery.

In addition to the budget announcement for the Agriculture sector, RBI also raised the limit of collateral-free agricultural loans to Rs 1.6 lakh from the current Rs 1 lakh, with a view to help small and marginal farmers. This enhancement will help the farmer to get the benefit without any collateral. However, the loan limits depend on the area of land holding by the farmer. In addition to that, RBI also decided to set up an internal working group (IWG) to review agricultural credit in the country. I believe the committee will recommend to amend the old practices in relation to land records, as 90% of the land records are digitalized in the country.

The intent to reward the well-rated NBFC by giving them opportunity to tap the funds at the rate based on their credit ratings is a welcome move. For the NBFCs, it would optimize their funding cost but the larger picture lies in the freeing of capital for the banks, which ultimately would benefit the industry including the NBFCs. As per the policy announcement, rated exposures of banks to all NBFCs, excluding Core Investment Companies (CICs), would be risk-weighted as per the ratings assigned by the accredited rating agencies. This is in addition to Asset Finance Companies (AFCs), Non-Banking Financial Companies–Infrastructure Finance Companies (NBFCs-IFC) and Non-Banking Financial Companies– Infrastructure Development Fund (NBFCs-IDF), which are already risk weighted as per the ratings assigned.

As per the latest available RBI data of Sept 18, The NBFC-ND-SI have a total borrowing of Rs.15.72 lakh crore, out of which Rs. 4.11 lakh crore and Rs.1.53 lakh crore is through bank borrowings and CPs respectively. Assuming all the CPs being subscribed by the banks, the total exposure works out to Rs.5.64 lakh crore, which is 36% of the total borrowings by the NBFCs. An amount worth of Rs.7.01 lakh crore falls under the category viz, Loan company, Investment Company, Factoring NBC and NBFC–MFI, which presently are not getting rating benefits.

The amount of borrowing from banking system, which, as per the new announcement would get rating benefit is Rs.2.52 lakh crore. In the rating calculation, given below, the change of risk weights, as per rating distribution would lead to capital saving equivalent to 7.58% of the assets under consideration, thereby releasing an amount of Rs.19000 Cr of capital. In order to attract foreign investors in debt market, the restriction on stipulated 20% limit (FPI's corporate bond portfolio) on investment in corporate bonds has been done away with. As per June 2018, SEBI circular some operational changes were announced for FPI in corporate bonds. Limits were prescribed on investments by FPIs and the time line to meet these limits. RBI is expected to announce the changes by mid-February 2019.

On the whole, the policy announcements will facilitate synergy between monetary policy and market microstructure. In addition, a clear and persuasive communication of inflation projections till Q3FY20 will anchor market expectations of further rate cuts.

About the author: Satish Singh is currently working as Chief Manager in State Bank of India's Economic Research Department, Corporate Centre, Mumbai, and has been writing mainly on financial and banking topics for the last 10 years.

Editorial NOTE: This article is categorized under Opinion Section. The views expressed in this article are solely those of the author and do not necessarily represent the views of In case you have a opposing view, please click here to share the same in the comments section.
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