Bankers and markets cheered the 25 basis points cut in repo rate by the RBI, but headwinds of slowing growth are turning out to be a cause for concern.

“The downward revision in GDP and inflation projections reveal near-term global headwinds and lower-than-anticipated rainfall might add to uncertainties,” said State Bank of India Chairman Rajnish Kumar while welcoming the decision to categorise additional 2 per cent of excess SLR for LCR calculation, as it will help banks release additional liquidity.

“This is the second time in a row that the RBI is reducing the signal rate. Cumulatively, the RBI has reduced the rate by 50 basis points, evidently to push economic growth,” said Sunil Mehta, Chairman, Indian Banks’ Association, and Managing Director and CEO, Punjab National Bank.

The RBI has lowered its growth projection for 2019-20 to 7.2 per cent from the previous estimate of 7.4 per cent amid probability of El Nino effect on the monsoon rains and an uncertain global economic outlook.

Analysts also said there could be upside risks to the RBI’s inflation outlook, which, it has now scaled down to 2.9 per cent to 3 per cent for the first half of the current fiscal, mainly due to lower food and fuel prices as well as expectations of a normal rainy season. Noting that wholesale price-based food inflation has been rising over the last two months and will impact CPI food inflation, Crisil, in a note, said: “We believe this will feed into the CPI food inflation in the coming months. The possibility of El Nino, and its impact on the monsoon, also poses a risk to food prices. At the same time, budgetary and political announcements (income support for the poor), if implemented properly, would add an upside to inflation.”

Another round of rate cut is not expected immediately. “The MPC is likely to wait for further clarity on monsoon and its impact on food prices, the fiscal math of the new government, and the evolving dynamics in the global crude market before making its next move. We expect the RBI to stay on hold in its June meeting.

“A rate cut in August would hinge on how the above mentioned risks unfold,” said Abheek Barua, Chief Economist, HDFC Bank.

Transmission of rates

Significantly, Mehta also raised the issue of transmission of interest rates by banks.

“Banks have transmitted the rate reduction to the tune of 10 to 12 basis points. Going forward, with this additional cut and improvement in the liquidity position, banks would take a call on further transmission,” he said.

YES Bank Chief Economist Shubhada Rao also noted that the RBI has been emphasising on monetary transmission, and the infusion of primary liquidity via OMO purchases and foreign exchange swap are steps in the right direction.

“By allowing banks to reckon an additional 2 per cent of G-Secs within the mandatory SLR requirement as FALLCR for the purpose of computing LCR (in a phased manner) will not only enable effective management of liquidity by bank balance sheets, but also raise the potential lending capability of banks, thereby supporting flow of funds to the economy,” said Rao.

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